Creature From Jekyll Island by G. Edward

The third paragraph ... granted 100 percent insurance to alldepositors, including the uninsured, and all general creditors.... Thenext paragraph ... set forth the conditions under which the Fed, aslender of last resort, would make its loans.... The Fed would lend toContinental to meet "any extraordinary liquidity requirements." Thatwould include another run. All agreed that Continental could not besaved without 100 percent insurance by FDIC and unlimited liquiditysupport by the Federal Reserve. No plan would work without thesetwo elements.1

By 1984, "unlimited liquidity support" had translated into the staggering sum of $8 billion. By early 1986, the figure had climbed to $9.24 billion and was still rising. While explaining this fleecing of the taxpayer to the Senate Banking Committee, Fed Chairman Paul Volcker said: "The operation is the most basic function of the 1. Sprague, pp. 162-63.

PROTECTORS OF THE PUBLIC

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Federal Reserve. It was why it was founded."1 With those words, he has confirmed one of the more controversial assertions of this book.

SMALL BANKS BE DAMNED

It has been mentioned previously that the large banks receive a free ride on their FDIC coverage at the expense of the small banks.

There could be no better example of this than the bail out of Continental Illinois. In 1983, the bank paid a premium into the fund of only $6.5 million to protect its insured deposits of $3 billion. The actual liability, however—including its institutional and overseas deposits—was ten times that figure, and the FDIC guaranteed payment on the whole amount. As Sprague admitted, "Small banks pay proportionately far more for their insurance and have far less chance of a Continental-style bailout."2

How true. Within the same week that the FDIC and the Fed

were providing billions in payments, stock purchases, loans, and guarantees for Continental Illinois, it closed down the tiny Bledsoe County Bank of Pikeville, Tennessee, and the Planters Trust and Savings Bank of Opelousas, Louisiana. During the first half of that year, forty-three smaller banks failed without an FDIC bailout. In most cases, a merger was arranged with a larger bank, and only the uninsured deposits were at risk. The impact of this inequity upon the banking system is enormous. It sends a message to bankers and depositors alike that small banks, if they get into trouble, will be allowed to fold, whereas large banks are safe regardless of how poorly or fraudulently they are managed. As a New York investment analyst stated to news reporters, Continental Illinois, even though it had just failed, was "obviously the safest bank in the country to have your money in."3 Nothing could be better calculated to drive the small independent banks out of business or to force them to sell out to the giants. And that, in fact, is exactly what has been happening. Since 1984, while hundreds of small banks have been forced out of business, the average size of the banks which remain—with government protection—has more than

doubled. It will be recalled that this advantage of the big banks p~Quoted by Greider, p. 628.

~ Sprague, p. 250.

New Continental Illinois Facing Uncertain Future," by Keith E. Leighty, Associated Press, Thousand Oaks, Calif., News Chronicle, May 13, 1985, p. 18.

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62 THE CREATURE FROM JEKYLL ISLAND

over their smaller competitors was also one of the objectives of the Jekyll Island plan.

Perhaps the most interesting—and depressing—aspect of the Continental Illinois bailout was the lack of public indignation over the principle of using taxes and inflation to protect the banking industry. Smaller banks have complained of the unfair advantage given to the larger banks, but not on the basis that the government should have let the giant fall. Their lament was that it should now protect them in the same paternalistic fashion. Voters and politicians were silent on the issue, apparently awed by the sheer size of the numbers and the specter of economic chaos. Decades of public education had left their mark. After all, wasn't this exactly what government schools have taught is the proper function of government? Wasn't this the American way? Even Ronald Reagan,