Creature From Jekyll Island by G. Edward

the money. To work out that plan, a summit meeting was arranged the next morning among the chairmen of the seven largest banks: Morgan Guaranty, Chase Manhattan, Citibank, Bank of America, Chemical Bank, Bankers Trust, and Manufacturers Hanover. The meeting was perfunctory at best. The bankers knew full well that the Reagan Administration would not risk the political embarrassment of a major bank failure. That would make the President and the Congress look bad at re-election time. But, still, some kind of tokenism was called for to preserve the Administration's conservative image. So, with urging from the Fed and the Treasury, the consortium agreed to put up the sum of $500 million—an average of only $71 million for each, far short of the actual need. Chernow describes the plan as "make-believe" and says "they pretended to mount a rescue."1 Sprague supplies the details:

The bankers said they wanted to be in on any deal, but they didnot want to lose any money. They kept asking for guarantees. Theywanted it to look as though they were putting money in but, at thesame time, wanted to be absolutely sure they were not riskinganything.... By 7:30 A.M. we had made little progress. We were certain the situation would be totally out of control in a few hours.

Continental would soon be exposing itself to a new business day, andthe stock market would open at ten o'clock. Isaac [another FDIC

director] and I held a hallway conversation. We agreed to go aheadwithout the banks. We told Conover [the third FDIC director] the planand he concurred....

[Later], we got word from Bernie McKeon, our regional director inNew York, that the bankers had agreed to be at risk. Actually, the riskwas remote since our announcement had promised 100 percentinsurance.2

The final bailout package was a whopper. Basically, the government took over Continental Illinois and assumed all of its losses.

Specifically, the FDIC took $4.5 billion in bad loans and paid Continental $3.5 billion for them. The difference was then made up by the infusion of $1 billion in fresh capital in the form of stock purchase. The bank, therefore, now had the federal government as a stockholder controlling 80 per cent of its shares, and its bad loans bad been dumped onto the taxpayer. In effect, even though 1 Chernow, p. 659.

2- Sprague, pp. 159-60.

60 THE CREATURE FROM JEKYLL ISLAND

Continental retained the appearance of a private institution, it had been nationalized.

LENDER OF LAST RESORT

Perhaps the most important part of the bailout, however, was that the money to make it possible was created—directly or indirectly—by the Federal Reserve System. If the bank had been allowed to fail, and the FDIC had been required to cover the losses, the drain would have emptied the entire fund with nothing left to cover the liabilities of thousands of other banks. In other words, this one failure alone, if it were allowed to happen, would have wiped out the entire FDIC! That's one reason the bank had to be kept operating, losses or no losses, and that's why the Fed had to be involved in the bail out. In fact, that was precisely the reason the System was created at Jekyll Island: to manufacture whatever amount of money might be necessary to cover the losses of the cartel. The scam could never work unless the Fed was able to create money out of nothing and pump it into the banks along with

"credit" and "liquidity" guarantees. Which means, if the loans go sour, the money is eventually extracted from the American people through the hidden tax called inflation. That's the meaning of the phrase "lender of last resort."

FDIC director Irvine Sprague, while discussing the press release which announced the Continental bail-out package, describes the Fed's role this way: