Volcker (64 page)

37
. Dorfman, “Superstar Betting $400 Million.”

38
. Ibid. attributes this view to Steinhardt, but it is not a direct quote from him.

39
. See Prepared Statement by Paul Volcker in
The Federal Reserve's First Monetary Policy Report for 1984: Hearings Before the Senate Committee on Banking, Housing and Urban Affairs
, 98th Congress, 2nd Sess., February 8, 1984, p. 18.

40
. Ibid., p. 108.

41
. See “How the Panic Followed the Sun in Debacle at Chicago Bank,”
Chicago Tribune
, May 27, 1984, p. 1.

42
. Continental is mentioned as the seventh-largest bank in 1984 in
History of the Eighties: Lessons for the Future
(Washington, DC: Federal Deposit Insurance Corporation, 1997), p. 236. Table 7.1 on the following page shows Continental as the eighth-largest in total assets at the end of 1981.

43
. See
Managing the Crisis: The FDIC and RTC Experience, 1980–1994
(Washington, DC: Federal Deposit Insurance Corporation, August 1998), p. 548.

44
. Wallace's quote is from the
Chicago Tribune
, May 20, 1984, p. W1. Continental's balance sheet showed that only 16 percent of its funding came from core deposits of local customers. See George Hanc,
History of the Eighties: Lessons for the Future
(Washington, DC: Federal Deposit Insurance Corporation, 1997), p. 255, Table 7A.1.

45.
See Table 7A.1, ibid., p. 255, for foreign office deposits. The
Chicago Tribune
, May 27, 1984, p. 1, gives the $8 billion that was renewed each day.

46
. See
Chicago Tribune
, May 20, 1984, p. W1.

47
. The $3.6 billion is reported in the
Chicago Tribune
, May 27, 1984, p. 1. Volcker told the Federal Reserve Board on Monday, May 14, 1984, that “Continental Illinois had been borrowing 3–5 billion daily at the discount window.” (See Federal Reserve Board Minutes, May 14, 1984, p. 8.)

48
. Borrowing by all 5,800 banks averaged $955 million during the previous eighteen months. The data on borrowing at the discount window is the average of monthly figures available at research.stlouisfed.org/fred2/series/BORROW.

49
. See
Chicago Tribune
, May 27, 1984, p. 1.

50
. Transcript, Federal Open Market Committee Meeting, May 22, 1984, p. 41.

51
. The principle of Too Big to Fail in the United States, usually associated with large bank failures, antedates Continental Illinois. See Benton Gup in
Too Big to Fail: Policies and Practices in Government Bailouts
(Westport, CT: Praeger Publishers, 2004), who makes the case that Too Big to Fail applies to a wide range of firms and industries, from Chrysler and Lockheed Aircraft in the early 1970s to New York City in 1975. I argue in
When Washington Shut Down Wall Street
(Princeton, NJ: Princeton University Press, 2007), pp. 123–26, that the Too Big to Fail doctrine goes back much further, to 1914, when Treasury Secretary William McAdoo subsidized banks to help prevent New York City from declaring bankruptcy. (Yes, New York was in trouble even back then.)

52
. The Office of the Comptroller of the Currency (OCC) was created as a bureau within the U.S. Treasury by the National Currency Act of February 25, 1863. The comptroller is a presidential appointee subject to Senate confirmation. The act was designed to implement a uniform national currency based on federally chartered banks to replace the multiple currencies issued by individual state-chartered banks. To accomplish that goal, the OCC was charged with the responsibility of monitoring the safety and soundness of national banks and to conduct periodic on-site examinations.

53
. The FDIC was established by the Banking Act of 1933, signed by President Franklin Roosevelt on June 16, 1933. The legislation is also known by the more popular title, the Glass-Steagall Act, after its cosponsors Senator Carter Glass and Representative Henry Steagall. Among other things, the act established the FDIC as an independent federal agency governed by a five-person board, each appointed by the president of the United States and confirmed by the Senate. The FDIC's insurance fund is financed by premiums charged to insured banks, but the agency is ultimately backed by the “full faith and credit” of the U.S. Treasury as a backstop to its accumulated capital.

54.
Details of the meeting vary according to the source. The clearest description is in the
Chicago Tribune
, May 27, 1984, p. 1 continued. Also see William Isaac with Philip Meyer,
Senseless Panic: How Washington Failed America
(New York: John Wiley, 2010), pp. 67–68; and Irvine Sprague,
Bailout: An Insider's Account of Bank Failures and Rescues
(New York: Basic Books, 1986), pp. 154–55.

55
. Isaac, with Meyer,
Senseless Panic
, p. 67.

56
. PIPAV.

57
. See
Statement of C. T. Conover, Comptroller of the Currency, Before the House Subcommittee on Financial Institutions, Supervision, Regulation, and Insurance
, 98th Congress, 2nd Sess., September 18, 19, and October 4, 1984, p. 205. Also see the interchange between Conover and Representative Wylie on pp. 291–92. Finally, see
Continental Illinois National Bank: Report of an Inquiry into Its Federal Supervision and Assistance: Hearings Before the House Committee on Banking, Finance and Urban Affairs
, 99th Congress, 1st Sess., July 1985, p. 164.

58
. The FDIC's investment represented almost 15 percent of its $15 billion insurance fund (see
Wall Street Journal
, May 23, 1984, p. 1 continued).

59
. The impetus for this meeting came from Treasury Secretary Donald Regan. Volcker had suggested that Connor and Isaac discuss the rescue plans with Regan. The treasury secretary suggested that they would have a greater chance of success with private bankers participating. See Sprague,
Bailout
, p. 156.

60
. At last count (June 2011), Volcker has received sixty-one honorary degrees from universities in the United States and abroad. Alphabetically, they begin with Adelphi and Amherst and end with Yeshiva and York (Toronto). He likes them all but is especially proud of the honors he received from his alma maters, Princeton and Harvard. (Yale conferred one as well, just to keep up.) The University of London conferred an honorary degree and considers him an alumnus even though he never finished his doctoral dissertation during his stay there. His family connections with Rensselaer, where his father went, and with Fairleigh Dickinson in Teaneck, where he grew up, make them special as well.

61
. PIPAV.

62
. The description of this meeting is based on a number of sources, including the recollection of Paul Volcker; Isaac, with Meyer,
Senseless Panic
; and Sprague,
Bailout
. I have noted in the text specific quotes attributed to each source.

63
. As reported in the
New York Times
, May 21, 1984, p. D6, by one of the participants.

64
. See Isaac, with Meyer,
Senseless Panic
, p. 69.

65
. PIPAV. Also see Isaac, with Meyer,
Senseless Panic
, p. 69.

66.
See Isaac, with Meyer,
Senseless Panic
, p. 69.

67
. PIPAV. Isaac confirms Volcker's opposition to the 100 percent guarantee: “Volcker was negative,” Isaac, with Meyer,
Senseless Panic
, p. 69.

68
. PIPAV. Isaac complained more formally in testimony before the Senate Banking Committee, “The Federal Reserve does not take any risk … The only agency that is at risk in the banking system, the true lender of last resort, is the FDIC.” See Hearings Before the Committee on Banking, Housing and Urban Affairs, U.S. Senate, 99th Congress, 1st Sess., Deposit Insurance Reform and Related Supervisory Issues, July 23, 1985, p. 27. Also see Sprague,
Bailout
, p. 162, for the relationship between the 100 percent guarantee and the $2 billion capital infusion. “After infusing $2 billion in the bank, we could make the guarantee because then it would be more cost effective to do an assisted merger or bailout than a payoff.”

69
. PIPAV.

70
. This is the third paragraph of the press release on May 17, 1984, distributed jointly by the Office of the Comptroller, the FDIC, and the Federal Reserve Board. See Sprague,
Bailout
, p. 276, for the entire document.

71
. See
New York Times
, July 26, 1984, p. D1, for a detailed account of Treasury's objections. William Isaac argues that debt covenants of the holding company precluded the FDIC's investing directly in the bank itself (other than as a loan) and that the creditors were protected by the assets of the holding company upon liquidation. See Isaac, with Meyer,
Senseless Panic
, pp. 74–75.

72
. PIPAV.

73
.
Wall Street Journal
, May 18, 1984, p. 3.

74
. Transcript, Federal Open Market Committee Meeting, May 22, 1984, p. 32.

75
. See Federal Reserve Press Release, July 20, 1984, pp. 1–13. The committee members discussed this omission at the meeting (see Transcript, May 22, 1984, pp. 38–39) and claimed that the professional Fed watchers could read between the lines and detect the subtle changes in the directive (which is what they are paid to do).

76
. Volcker summarized the discussion at the meeting on May 22, 1984 (transcript, pp. 27–28): “My bottom line is that we've run out of room for the time being for any tightening … [but] I don't have any sense here that we should be easing.”

77
. The increase in the Consumer Price Index measured 3.4 percent from August 1, 1984, through August 1, 1985, compared with 12.9 percent from August 1, 1979, through August 1, 1980.

78.
Unemployment stood at 7.1 percent in August 1985. The last time it was that low (or lower) was April 1980, when it was 6.9 percent.

79
. The average price of the afternoon London gold fixing was $414 during November 1982, compared with an average of $317 during the month of July 1985. Gold was high in November 1982 because of the Mexican crisis. Using June 1982 as a benchmark, when the price of gold averaged $315, shows virtually no change. On August 6, 1985, the price closed at $319.80.

80
. Robert L. Hetzel,
The Monetary Policy of the Federal Reserve: A History
(New York: Cambridge University Press, 2008), p. 178, writes, “The year 1985 should have been a time of satisfaction for the FOMC. It had brought down trend inflation to 4%. With dramatic increases in the funds rate [in] 1984, it had confronted and subdued the inflationary expectations created by a strong economic recovery.” The Annual Report of the Council of Economic Advisers, February 1986, Washington, DC, p. 37, said: “The current expansion that began in November 1982 marks an important departure from the pattern of persistently rising inflation rates … What is particularly unusual compared with the average postwar expansion is that the inflation rate has continued to decelerate during the third year of this expansion.”

81
.
The Re-nomination of Paul Volcker: Hearings Before the Senate Committee on Banking, Housing and Urban Affairs
, 98th Congress, 1st Sess., July 14, 1983, p. 18.

82
. See chapter 13 and Reagan's diary entry for June 7, 1983, in Douglas Brinkley, ed.,
The Reagan Diaries
, vol. 1 (New York: HarperCollins, 2009), p. 234.

83
. The ten-year rate was 10.65 percent on August 6, 1985, compared with an average of 13.42 percent during the entire month of May 1984, and 13.99 percent on May 30, 1984. It was 8.91 on August 6, 1979.

84
. The ten-year rate was 8.91 percent on August 6, 1979, and was 10.65 percent on August 6, 1985. The monthly payment at 8.91 percent equals $893 versus $1,008 at 10.65 percent, for a difference of $115 per month or $1,380 per year.

85
. For August 1985 the overnight federal funds rate averaged 7.92 percent, the year-over-year inflation in the Consumer Price Index measured 3.4 percent, and the Survey of Professional Forecasters reported (for the third quarter) a one-year expected inflation of 4.21 percent. For August 1979 the numbers are 10.94 percent for federal funds, CPI inflation of 11.8 percent, and an expected inflation of 8.03 percent. Although the expected inflation forecasts are for one year ahead the ten-year expected rate moves in the same direction, although by a smaller amount.

86
. The 5 percent deficit number comes from an estimated deficit of $202 billion for 1986 and a GNP of $3,992 billion for 1985. See Annual Report of
the Council of Economic Advisers, February 1986, Washington, DC, pp. 252 and 339.

87
. See “Plan to End Deficit in 1991 Gaining Wide Support,”
New York Times
, October 4, 1985, p. A32.

88
. See William Niskanen,
Reaganomics: An Insider's Account of the Policies and the People
(New York: Oxford University Press, 1988), p. 66.