Continental Illinois case study Settings: Continental Illinois was one of the largest banks in the world. The bank in the seventies benefited from its aggressive strategy that was limited to taking a great number of deposits across industries as well as making a great number of loan across industries hardly assessing any risks associated with the loans. Quite often, as the case reads the bank would provide a loan at a rate below the prime rate, if the loan officers found it necessary. What should be noted is the fact that the Continental Illinois did not utilize any hedge to reduce its risks as well as it did not consider proper risk measure to at least somehow protect itself from the possible defaults on the loans. When it became apparent the bank took too much of bad loans that would never be repaid a run on the bank occurred. No one in the economy could believe that such a large institution that Continental Illinois was could ever fail on its deposits.
The bank did not fail the first round and continued to collect more investments and making more bad loans. After the collapse of the major bank Penn Square where Continental Illinois had a large stake of funds the market had to adjust and put the Continental Illinois stock in a drain. After some reluctance the main credit agencies had to downgrade the Continental Illinois stock and bonds to risky level and the run on bank occurred again. At that point of time it was apparent that Continental Illinois would go bankrupt and unless some quick action is taken it would drastically damage the US economy and reduce the confidence in the whole US banking industry for households and companies. 1. Was the CI rescue and restructuring successful? why was it successful? Having read the case about Continental Illinois (Continental Illinois) and understood the problem I would like to note that the rescue and restructuring efforts were indeed successful.
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The matter of success was probably attributed to the government role in the crisis. The US government is famous for non-interference in the business processes of individual companies. Whenever a US government interferes in the business activity or in the bail out process it usually means that something serious goes on with the company which indeed was the case with Continental Illinois Bank. The bank that was one of the largest banks in the US was indeed too big to fail even for the worlds largest economy. Please refer to the pre-conditions that caused the US government abandon the capitalist principles of allowing the bank to fail and did the best they could to support the monster on clay feet. Deposits from the households.
The bank had generated about $6 billion dollar worth of deposits from the general populace most of which had kept it in bulks of $100,000 and thus had it unsecured with respect to the FDIC. The bankruptcy of Continental Illinois would certainly deprive a great number of people of their savings thus increasing the lack of confidence in the banking industry that would negatively influence other banks in the US economy. The people stripped of savings of would decrease spending thus affecting the whole countrys GDP and deprive the US of adequate growth. Deposits from the banks. About 22 smaller banks were considered to have invested up to 100% of their excessive funds into the equity (stock) Continental Illinois. The other 40 plus banks had kept from 50% to 100% of their equity assets invested in Continental Illinois stock.
The great number of banks that was so much exposed to the performance of Continental Illinois was highly correlated with the general performance of Continental Illinois and certainly would if not completely go bankrupt, then at least would severely be affected by the devaluation of the Continental stock or their deposits in continental Illinois. The companies that had invested the excessive funds in the continental Illinois usually did it in bulks over $100,000 which meant that they would not receive they money in full. This could also mean that some companies would fail to perform well without the funds they lost in Continental Illinois, thus negatively influencing the whole US economy. The pension funds and the insurance companies that also invested a significant portion of their funds in Continental Illinois, also had their funds invested in bulk sums over $100,000 and thus were also not insured by FDIC. These companies that usually attempt to be conservative in their investment policies did not expect one the worlds largest banks to go bankrupt. The situation with Continental Illinois could somehow be compared to what went on with Enron, when many of the Enrons workers lost all their savings. In case with Continental Illinois, it would affect a much larger portion of individuals who would not lose all but a significant portion of their investment. Thus one has to understand that the restructuring and rescue of the bank was necessary for the whole region if not whole country to remain financially healthy and sound.
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If the rescue of Continental Illinois was unsuccessful than after the collapse of Continental Illinois, about 30 other banks would also collapse, pulling down a great number of people who invested their funds in either Continental Illinois or any of these 30 banks, pulling down industries and companies that had their funds invested in any of these banks, as well as pulling down insurance companies and pension funds that although had a limited exposure still would be negatively affected by such monstrous collapse that Continental Illinois was about to enter into. The Fed agreed to provide a large sum of money to the Continental Illinois bank through the discount window yet it did not have much effect on the plummeting stock and the reduction of confidence in general populace. It was even considered to let the bank fail, yet after the chemical bank had seen an 11% stock fall caused solely by the rumors that Chemical might have some liquidity problems, It became apparent that the bail out of Continental Illinois was necessary to keep the investor confidence in the US banking industry high. The US government organizations agreed on the purchase of over $4 billion worth of bad loans for $1 billion in an attempt to somehow increase the confidence in the Continental Illinois economic status. Unlike in the 1950s when the FDIC in such case would estimate the overall bank value and decide on whether to liquidate it and pay off the creditors or to arrange an acquisition to benefit the public. With the Continental Illinois case it was apparent that no single institution was able to acquire Continental Illinois and repay its debts, thus making Continental Illinois too big and too expensive to liquidate without substantial impact on the whole US economy.
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2. With hindsight and considering Prof.Kaufman’s report, was the decision to restructure justified? Explain why or why not. Having considered Prof Kaufmans report regarding the absence of necessity to bail out the Continental Illinois bank, I believe that one has to answer this question taking into account the following parties involved: US economy, US politics, US society (general populace), ethics, and technology. US economy. It was apparent that due to the high level of integration between Continental Illinois and around 50 other banks in the USA each of these banks would suffer losses. These losses would certainly turn into much tighter lending policy by these banks, or even the failure of these banks altogether. Over conservative banking policy would make loans very difficult to obtain for companies and individual thus causing many industries to halt and many individuals to abandon the idea of obtaining a loan.
The negative effect of Continental Illinois bankruptcy would ripple through the US economy. The US economy would be negatively influenced. Political. The current government, the President and the Institutions would be the ones to blame not only for allowing thousands of private individuals to lose their deposits in Continental Illinois, for hundreds of companies to fail and several dozen of other banks to be adversely affected by the ripple effect that Continental Illinois bankruptcy would cause, but also for the whole negative trends in the US economy that would certainly start after the bankruptcy of the Continental Illinois bank. The current political party would be perceived by the society as negligent of the society needs, and therefore is more likely to work on the ways to prevent the Continental Illinois bank from going down. The US society/ households is the main force and the engine of the US economy. The client is the king and the client is always to be protected by the US laws. In the case with Continental Illinois, the client was not protected but rather left in the wilderness to experience the bankruptcy of the bank the clients funds were deposited to. Apparently, after a client witnesses his/her money disappear in one of the worlds largest banks, one can assume that that individual till the end of his life would dissuade his family and friend from trusting banks, let alone small or startup banks. The whole US banking industry would lose the customer trust, thus also making the appearance of small banks impossible because no one would ever trust these startups after the big banks fail. Without the individual investor confidence in the US banking (or any other) industry such industry is unable to develop dynamically.
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Finnish Economy and Society Content 1. Finnish Economy 1.1 Key statistics of Finnish Economy 1.2 Labor force in Finland 1.3Sectors of manufacturing 1.4Main branches of industry 1.5Main imports and exports 1.6Sources of energy 1.7Finnish companies and brands 2. Finnish Society 2.1 My own observations and experience of Finnish 2.2Environment during the time I living in Finland 2.3Everyday life ...
By negatively affecting the society well being the failure of Continental Illinois would negatively affect the US economy and US political leaders mentioned above in the essay. Ethics. From the capitalist point of view where each person should get according ….
