Creature From Jekyll Island by G. Edward

Future banking practices would have been severely altered, and the long-term economic benefit to the nation would have been enormous. But with government intervention, the discipline of a free market is suspended, and the cost of failure or fraud is politically passed to the taxpayers. Depositors continue to live in a dream world of false security, and banks can operate recklessly and fraudulently with the knowledge that their political partners in government will come to their rescue when they get into trouble.

FDIC GENEROSITY WITH TAX DOLLARS

One of the challenges at Continental was that, while only four per cent of its liability was covered by FDIC "insurance," the regulators felt compelled to cover the entire exposure. Which means that the bank paid insurance premiums into the fund based on only four per cent of its total coverage, and the taxpayers now would pick up the other ninety-six per cent. FDIC director Sprague explains:

Although Continental Illinois had over $30 billion in deposits, 90

percent were uninsured foreign deposits or large certificatessubstantially exceeding the $100,000 insurance limit. Off-book1- Chernow, p. 658.

Sprague, p. 153.

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liabilities swelled Continental's real size to $69 billion. In this massiveliability structure only some $3 billion within the insured limit wasscattered among 850,000 deposit accounts. So it was in our power andentirely legal simply to pay off the insured depositors, let everythingelse collapse, and stand back to watch the carnage.

That course was never seriously considered by any of the

players. From the beginning, there were only two questions: how to come to Continental's rescue by covering its total liabilities and, equally important, how to politically justify such a fleecing of the taxpayer. As pointed out in the previous chapter, the rules of the game require that the scam must always be described as a heroic effort to protect the public. In the case of Continental, the sheer size of the numbers made the ploy relatively easy. There were so many depositors involved, so many billions at risk, so many other banks interlocked, it could be claimed that the economic fabric of the entire nation—of the world itself—was at stake. And who could say that it was not so. Sprague argues the case in familiar terms: An early morning meeting was scheduled for Tuesday, May 15, at the Fed. .. We talked over the alternatives. They were few—none really.... [Treasury Secretary] Regan and [Fed Chairman] Volcker raised the familiar concern about a national banking collapse, that is, a chain reaction if Continental should fail. Volcker was worried about an international crisis. We all were acutely aware that never before had a bank even remotely approaching Continental's size closed. No one knew what might happen in the nation and in the world. It was no time to find out just for the purpose of intellectual curiosity.

THE FINAL BAILOUT PACKAGE

The bailout was predictable from the start. There would be some preliminary lip service given to the necessity of allowing the banks themselves to work out their own problem. That would be followed by a plan to have the banks and the government share the burden. And that finally would collapse into a mere public-relations illusion. In the end, almost the entire cost of the bailout would be assumed by the government and passed on to the

taxpayer.

At the May 15 meeting, Treasury Secretary Regan spoke

eloquently about the value of a free market and the necessity of having the banks mount their own rescue plan, at least for a part of 1. Sprague, p. 184.

2. Ibid., pp. 154-55,183.

PROTECTORS OF THE PUBLIC

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