IN NEW YORK, as presumably elsewhere, the Continental Illinois National Bank took out a full-page ad on Friday, Deliverance Day. If Leon Trotsky had written it, it could not more effectively have undermined respect for American capitalism.
Starting with the headline "At last, a rumor we can confirm," it stayed right in that jaunty mood. Its lead sentence read: "These past few months you've probably heard more about Continental than you'd care to know."
That is what I call leading with your chin. The average American is as interested in Continental Illinois as he is in the annual rainfal in Tierra del Fuego, which for all we know is one of the principal investments of Continental.
Next: "Now, we're happy to report, we have a plan designed to solve our problems in the best interest of everyone concerned." There are several problems with that sentence. The first is that it wasn't Continental's plan, it was a plan of the comptroller of the currency, the Federal Deposit Insurance Corporation, and the federal Reserve Board. A plan certainly designed to make the shareholders and bondholders of Continental "happy." Making them happy was not a plan incorporated in the Declaration of Independence or in the Constitution. Most banks can be made "happy" if you undewrite $4.5 billion of their bad debt. The "plan" was the government's, and it was designed to avoid the chaos that would have resulted from requiring continental to face the market discipline of its foolish practices.
"The key provision of the plan is that Continental will continue to operate as a vital financial institution, free of the bulk of the problem loans which had become a burden on our financial and human resources." A burden on their human resources. Sure. Any burden on one's financial resources can become a burden on one's human resources. It is also a burden on one's human resources when one goes to jail. The moral question that some Americans are considering is: Why did Continental's burden become out burden?
Now, there are a lot of plausible answers to this, primarily that the entire banking system would suffer a grievous shock if Continental went down. That, most Americans can understand. If emergency action is needed to prevent a lot of banks from sliding over Niagra Falls, then take that action. But there is no moral reason to shield the $800-million equity of Continental shareholders by using public money. Public money is here defined as money printed by the Federal Reserve Board.
On May 18, the Fed made an error of grave psychological consequence. It was then that the regulators announced that all depositors of Continental would be protected, never mind the $100,000 ceiling set by the Federal Deposit Insurance Corporation. Protection for individual depositors by the FDIC is an accepted convention of the New Deal, designed to protect depositors against collapsing banks. To enlarge that guarantee in order to protect general creditors is primarily a political act, i.e., an act designed to weigh alternatives and to select the one that gives least pain to most people.
The trouble with political solutions, however, is that the individual American taxpayer becomes, increasingly, a general creditor--left with highly illiquid returns. The federal pool that salvaged Continental via the FDIC is out $1 billion. It has access to equity that may or may not, in the years to come, return some of its investment.
But whethe it does (as in the case of Chrysler, where the government ended by profiting from its bailout) or it doesn't, the psychological precedent is set according to which any substantial group of investors in any enterprise can cite Continental--as, before it, Chrysler; as, before it, Lockheed--to make a social point. "Bail us out, because the alternatives are too painful." As Continental puts it, you would need only to proclaim that your business ahd "become a burden on our financial and human resources." And the Feds will come running to help.
Congress had better grope its way out of the crystallizing paradox. On the one hand we favor deregulation of the banking industry as economially healthy for America. On the other hand, we appear to be weaving a security blanket that argues that competition is ultimately meaningless because, when all is said and done, government is there to protect against risk.
You will hear the name of Continental on the lips of every special-interest advocate of cradle-to-grave protection for American businesses; except that graves, by the dictates of the New New Deal, will be abolished.