Bailout: An Insider's Account of Bank Failures and Rescues

by Irvine H. Sprague

The engrossing story of how the Federal Deposit Insurance Corporation handled four bank failures. During the high interest times of the 1970s and 1980s, banks and savings and loan associations were under heavy financial pressure. Hundreds of them failed. The Home Loan Bank Board permitted the savings and loan associations to treat goodwill as capital, thereby allowing them to remain open and to build up enormous losses that eventually cost the taxpayers billions of dollars. The Federal Deposit Insurance Corporation took a different approach. It closed the banks or sold them, all at no cost to taxpayers. Bailout is the engrossing story of how the FDIC handled four of these failures.

299 pages, Paperback

First published January 1, 1986

Reviews

[Frank Stein · Rating 4 out of 5]

My main question is, why isn't this book cited more often?

From the title you might think it was one of the slew of books to come out since the 2008 financial crisis, but it was actually written in 1986 by the former chair of the FDIC. Unfortunately for him but fortunately for the reader, he was involved in all of the four major bank bailouts of the second half of the 20th century. What were these unheralded bank bailouts you may ask? Many people have cited the 1984 bailout of Continental Illinois, then the 7th largest bank in the US, as the beginning of the "Too Big to Fail" doctrine and the beginnings of a bailout regime. After all, one of the author's fellow FDIC directors, Comptroller of the Currency Todd Connover, coined the term in testimony to Congress after the fact, where he said the biggest 11 banks in the country were all TBTF. If they got in trouble, he admitted the FDIC would come running.

What the author shows though is that there were three previous bailouts, little noted by the press or Congress. The FDIC, by using Section 13(c) of the FDIC enabling act, made an "essentiality" finding in each of these cases, declaring these banks essential to the economic health of their community and thus their survival a public necessity requiring public funds. The first of these was in 1971, where the tiny Unity Bank of Boston was propped up. Why bail out a bank that clearly wasn't "Too Big"? The reason, the author says, was that it was a minority-owned bank in a restless inner-city location. As he says, "my vote to make the 'essentiality' finding and thus save the little bank was probably foreordained, an inevitable legacy of Watts. And since mine was the deciding vote, it may not be too much to say that the Watts riots ultimately triggered the essentiality doctrine." WOH! This is the last place where one expected to find the origins of modern bank bailouts, in the charred husks of LA's Watt district in 1965, but there it is. The second bank saved, Commonwealth in Detroit, was saved for similar reasons. Then First Pennsylvania of Philly was simply TBTF in 1980, and then, finally Continental. Each bank bailout was larger than the last. The essentality doctrine seemed to run away from itself.

But the author complicates even this story though. He mentions that Section 13(c) was added to the FDI Act in 1950 after FDIC had been bailing out just about every failed bank at 100% of their liabilities in the late 1940s and Congress wanted to rein it back in with a more limited authority. That kept it under control for just 21 years. In 1991 FDICIA tried to rein it in again, and that worked for just another 17 years.

And even before those bailouts the author mentions that the Reconstruction Finance Corporation (RFC) bailed out many banks in the Depression, including a younger Continental Illinois, which soon protested the very constitutionality of the FDIC, one successor to the RFC, in the courts as an unnecessary extravagance. He even notes that many of the "assistance" packages the FDIC used in the 1980s (and today, I might add) to help other banks buy up failed ones have all the qualities of a bailout, with little of the public press.

So besides being a surprising blow-by-blow of how bank bailouts and liquidations actually work, at all sizes of banks, this book reminds us that bailouts have been around for quite awhile, in a myriad of forms, and therefore they'll probably be with us for quite awhile more.

[Henry · Rating 5 out of 5]

Starts dry, but ends like a James Bond thriller. First hand accounts of four seminal bailouts of the seventies and eighties gives you a sense of how crazy the current bailout is going to be.

[Chris · Rating 5 out of 5]

Did you know that the Continental Illinois bailout was indirectly a result of the Watts Riot and a 1960's-era Mohamed Yunus kickstarter campaign in Roxbury? (None of which, by the way, solved American racism or narrowed the black/white wealth gap.) Funny thing about people who were actually there, in charge, making the decisions: they know things you and I don't.



Have a look at the "tiny" bank sizes (only a few $billion) the US government struggled to bail out in the 1980's, recall that the G-SIFI cutoff *begins* at >$100bn, and call your representative in Washington DC.

[Sheila]

How have I never heard of this book before????

[Thorvald · Rating 5 out of 5]

Should be required reading together with Sheila Bair's latest