What I Learned Working at the Original Too Big to Fail Bank

One of the biggest and best banks of its time was also the first bank to be called “too big to fail.” I should know. I worked there.

Continental Illinois National Bank and Trust Co. of Chicago would have been 155 years old next year. You may be surprised to hear me praise this institution so highly. But it was my first real job and the place where I learned how to be a professional, including how to be professionally skeptical.

I joined Continental in 1981 as an intern in the employee relations department. The bank’s lending training program faced a charge of persistent discrimination by the Equal Employment Opportunity Commission in the recruiting, hiring, retention, and promotion of their lending program trainees. The bank hired several PhDs to build the data case that would prove otherwise. I spent three summers and all my school holidays during college primarily digging through dusty files gathering data to defend Continental Bank against the EEOC charge.

I was enormously proud to ride the train from the South Side of Chicago every day to work at a world-class bank wearing a navy blue suit and matching low-heeled navy classic Ferragamo bow-style pumps. Continental Bank headquarters was a beautiful, historic building at 231 S. La Salle St., across from the Federal Reserve Bank of Chicago and at the beginning of the financial district “canyon” anchored by the architecturally significant art-deco Chicago Board of Trade. 

This was the age of gracious banking. We had “coffee” dates with colleagues every morning in the subsidized cafeteria. Bank officers dined in a private buffet or oak-paneled rooms served by tuxedoed waiters when entertaining clients. I aspired to one day make it to their pay grade.

When I started working there in 1981, Continental Bank was the largest commercial and industrial lender in the United States. The bank had been buying loans from Penn Square, a tiny Oklahoma City shopping mall bank run by a guy named Bill P. "Beep" Jennings since 1978. However, significant growth in the syndication of the loans originated by Penn Square did not occur until 1981 and Continental funded its purchases with foreign and domestic overnight deposits rather than traditional retail ones. 

When Penn Square went belly up in 1982, the shock was heard around the world.Bank examiners and Continental Bank’s internal auditors had been documenting the deterioration of underwriting quality and the poor collateral due diligence as the volume of loans purchased from Penn Square ramped up.  

Unfortunately, no one listened. Just like no one listened 16 years later, in 2000, when Harry Markopolos tried to tell the SEC about the Madoff Ponzi scheme. It wasn’t until Penn Square’s failure that the world really paid attention to how Continental Bank had grown so big so fast.

Continental Bank, according to an FDIC report, “was the largest participant in oil and gas loans at Penn Square and experienced large losses on those participations.” Even worse, when Continental’s internal auditors visited Penn Square in December 1981 they found $565,000 in personal loans from Penn Square to John Lytle, the Continental Bank officer responsible for acquiring the Oklahoma City bank’s loans. According to testimony by C. T. Conover, then the Comptroller of the Currency, to the House Subcommittee on Financial Institutions Supervision, Regulation, and Insurance in September 1984, senior Continental Bank management heard about the loans but never received the full audit report. Lytle was not removed from his position until May of 1982 and did not leave the bank until August 1982.

Mark Singer, in his book “Funny Money”, theorizes that Continental executives repeatedly ignored danger signs rather than actively covered them up. “Among bankers there is an inbred tendency to react to a fiscal humiliation as if one had spilled gravy on a tablecloth or neglected to send a hostess a thank-you note.”

As of March 31, 1984, according to a GAO study, Continental Bank had approximately $40 billion in assets. It was the largest bank in Chicago and the seventh largest bank in the United States, in both assets and deposits. That GAO study says the Continental Bank crisis started on May 8, 1984 when the bank faced a sudden run on its deposits. The run began in Tokyo when a wire story reported rumors that a Japanese bank might acquire Continental Bank. According to reports at the time, “when the item was picked up by a Japanese news service, the translator turned ‘rumors’ into ‘disclosure’ and Far Eastern investors holding Continental's certificates of deposit panicked at the implications. That day, as much as $1 billion in Asian money fled from the bank.”

Eight days after the run began, regulators announced a bailout. The FDIC put $4.5 billion in new capital into the bank, assumed liability for the bulk of Continental's bad loans and began the search for another bank to take over the institution. To fulfill a promise to protect insured and uninsured depositors from any losses, the Fed made additional emergency loans to Continental Illinois that rose to $8 billion.

I joined Continental Bank full-time in June of 1984 as a trainee. There were 50 of us hoping to be placed in internal audit, IT, or accounting after completion of a 15-week rotational training program. But the bank run did not subside over the summer and we started to worry there would be no bank and, therefore, no job for us at the end of the training. Continental Bank was shrinking in response to the money market’s continued lack of confidence after the May funding crisis. Federal regulators found no buyer for it and, in late July, the bank was nationalized.

Continental Bank, and my fellow trainees and I, survived the summer of 1984. In 1997 the FDIC was still describing the 1984 bailout transaction as “the most significant bank failure resolution in the history of the Federal Deposit Insurance Corp.” It was the biggest failure too, until the takeover of Washington Mutual in 2008.

In the fall of 1984 I went to work in internal audit, reviewing trust accounts that had farmland and crops as their primary assets. My impression of the bank’s internal audit team was positive. The department was filled with serious audit professionals who went out in the field and on the road all over the world to ask the hard questions. During this era there was no discussion of risk management other than what a trader or lender might be concerned about.

Unfortunately, the Penn Square loans to Continental Bank’s Lytle are an example of the obstacles we faced as internal auditors all the time. It was rare, in my observation, for an unpleasant or embarrassing internal audit report to ever make it to top management or to capture their attention if the issues raised could put the brakes on revenue growth.

The FDIC agrees. In a case study of the Continental Bank failure included in the report, “History of the Eighties  - Lessons for the Future”, the agency says, “There was little doubt that the bank’s management had embarked on a growth strategy built on decentralized credit evaluation unconstrained by any adequate system of internal controls and that the bank had relied on volatile funds. But how well had the responsible bank regulators assessed Continental’s situation, and should they have been more assertive in requiring the bank to change its lending and other high-risk practices?”

I passed the C.P.A. exam in 1986 and left the bank in 1988 to take a job as an accounting manager at a publicly held distributor of electronics components. It was a step up in pay and a chance to manage people.

The FDIC slowly re-privatized Continental Bank after the bailout by periodically selling its shares to the public. The last shares were sold and the bank completely returned to private hands in 1991. In 1994, the bank was bought by the old (West Coast) Bank of America.

To see how much and, yet, how little has changed for the banks since, it’s interesting to look at Continental’s 1984 peer group. According to the Comptroller of the Currency’s testimony the eight wholesale money center banks in the bank’s peer group were Bankers Trust, Chase Manhattan Bank, First National Bank of Boston, First National Bank of Chicago, Irving trust Co., Manufacturers Hanover Trust Co. and Morgan Guaranty Trust Co.  

Bank Boston, the successor bank of the First National Bank of Boston, was also acquired by Bank of America. 

Nearly all the rest are now part of JP Morgan Chase.

My early professional education at Continental Bank significantly influenced my career and my attitudes about regulation and responsibility in financial services. Other alumni have gone on to bigger things than I did, though not always better.

Jon Corzine, for example, began his career in finance in 1970 as a portfolio analyst at Continental-Illinois National Bank in Chicago while he was in business school at the University of Chicago. Recent reports that Corzine emasculated MF Global’s chief risk officer, and that regulators dropped the ball overseeing the brokerage before it cratered, show that the problems I witnessed at Continental still haunt financial services.

Roland Burris was a vice president at the bank from 1964 to 1973. Burris is best known today as former Governor of Illinois Rod Blagojevich’s appointee to complete Barack Obama’s term as U.S. Senator after Obama became President. (Blagojevich described the Senate seat as being worth its weight in gold, though not in so many words.) But long before this ignominy, Burris started his career as the first African-American to examine banks in the United States.

And Andy Fastow and his wife Lea both worked for Continental Bank after earning MBAs from Northwestern University. Andy Fastow, as most readers know, eventually became CFO of Enron Corp. While at Continental, he completed the bank’s lending training program and was placed in the energy lending group to work on the new “structured finance” team. This is ominous in retrospect, and if you don’t see why, just Google “Chewco.”  

By the time the bank was re-privatized, Continental Bank management had initiated several transactions intended to focus the bank solely on its strengths. Continental Bank’s delegation of the majority of its internal audit activities to PriceWaterhouse in 1991 was the first large-scale partial outsourcing of an internal audit function. Also in 1991, the bank signed a 10-year contract to outsource most of its information technology operations to IBM. It was the largest bank at the time to outsource IT, according to an article in the Chicago Tribune. Additionally, “the bank contracted out its entire legal department to the law firm Mayer Brown & Platt. It had already hired Marriott Corp. to run its cafeteria and LaSalle Partners to manage its buildings.”

The officers’ lunch buffet was also closed. A golden era had passed.

Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.