Runaway Rumor

3 minute read

Continental Bank’s dark day

When someone starts an ominous rumor about Chicago’s Continental Illinois Bank, people generally listen. Reason: the whispered tales have often been true. Continental, the biggest banking company (assets: $41.4 billion) between San Francisco and Manhattan, has during the past two years established an unfortunate record of making loans that go sour. In 1982 it suffered a major blow from the failure of Oklahoma City’s Penn Square Bank, which had sold Continental $1 billion in shaky energy loans. Currently, its beleaguered borrowers run the gamut from Argentina to International Harvester. During the first quarter of 1984, Continental’s problem loans increased by $400 million, to $2.3 billion.

Last week new rumors about Continental swept through financial markets.

The story had it that Continental was about to fail and that federal officials were trying to persuade another, and healthier, bank to buy it. Dubious as it was, the news managed to cast a long shadow over the whole banking industry. Jittery traders scrambled to sell bank-issued certificates of deposit and rushed to seek safety in U.S. Treasury securities. Dealers in other markets temporarily lost confidence in the rising dollar and started bidding up the price of gold. Even the porkbellies market reacted, and prices fell because Continental is a big lender to commodities traders. Some traders apparently helped stir up the panic to make a quick profit.

Officials at Continental were incensed. David G. Taylor, who became chairman last month, denounced the rumors as baseless and threatened to sue wire services that had reported them. The journalists, he said, had spread the gossip without checking the facts. In a highly unusual move, C. Todd Conover, the U.S.

Comptroller of the Currency and a top federal bank regulator, tried to squash the stories by declaring that the investment positions of Continental’s balance sheet “compare favorably to those of other major multinational banks.” He also denied a Japanese wire-service story that he was trying to find buyers for Continental in Japan and elsewhere.

Continental is particularly vulnerable to scare stories because it has relatively few consumer clients. Most of its deposits come instead from institutional investors and brokers, who often take flight at the first hint of trouble, or imagined trouble.

Late last week, though, confidence in Continental returned as quickly as it had left. Top officials from several U.S. banks called Continental to express their support. Said a relieved Taylor: “Rumors about the bank are being put to rest, and calm is being restored.”

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