Dazed and Confused

When is a bank "TBTF" ?? Back in 1984 Continental Illinois Bank had to be "bailed out" by
the Federal Reserve Bank. It was (and still is to this day) the largest bank failure in
history. It resulted in Continental Illinois bank becoming a defacto government run institution.

But it also because of that fact that CIB needed to show some profit to "justify" its existence in 1987. As one of Chicago's largest banks and a global player, the institution was regarded as vital to the very existence of the International Monetary system. Continental had a truly global presence, trading rooms in London and Asia, and a majorly important spot in Chicago Finance.

The building was across the street from the Chicago Board of Trade and had a Roman temple
look to it. It was also architecturally identical to the Federal Reserve Bank of Chicago, just across the street. CIB was across the other street from a derivatives exchange and this certainly had future implications for the bank.

A popular thing for banks to do was to try to diversify income from assets in the 1980s. And instead of selling toasters, Continental made the decision to buy a major brokerage player and institutional trading player from a prominent Market Making firm at the New York Stock Exchange.
Remember that back then the situation was a flattening yield curve. Banks make money in steep yield curve situations, when they canb borrow short (liability management[checking, money market and FX trading,) and lend long (selling mortgages and long term corporate lending).

Rules were quickly established for market-makers (customers of the new CIB brokerage house, as a
clearing member) on all exchanges to not allow trading in any agricultural derivatives. Any trading would be done in strictly financial instruments.

On October 19, 1987, over at the CBOE, a member of the CBOE and a customer of this brokerage house had an uncovered put writing program. Losses from this alone topped $60 million. Total losses for the crash market makers topped $90 million at this brokerage house.

As a result, Continental Illinois Bank, with guarantees from the Federal Reserve Bank loaned the brokerage house $90 million to avoid default. This event was unprecedenbted. It meant, essentially, that the US taxpayer was underwriting the results of an incredibly risky naked put writing strategy, executed by a few young, brash traders from the Orient on the floor of the Chicago Board options Exchange.

Back in the brokerage house members' lounge, I asked the brokerage house office manager if I could draw a check for a portion of handsome profits, following my profuit taking.

He answered, "We are not issuing any checks at this time or for the forseeable future".

I went home that night and drank heavily with the locals at Ruthie's tavern on Kedzie. The multi-day crash had raised my blood pressure to near stroke levels and I'd been up about 72 hours at that point first partying, then fretting.

My father told me, "nothing significant happened". To the layman, this was true and it explained
the spurt of equity buying in the coming days. But, I had just traded through and lived through
a 7 standard deviation market move, which had the approximate probability of occuring once every 7,000 years.