The Federal Deposit Insurance Corp. decided Thursday to shed 30 percent of its stake in Continental Illinois Corp. by selling 50 million shares of common stock to the public before the end of the year.
FDIC Chairman L. William Seidman told the National Press Club that he is aiming for a ”quick privatization” of the federally rescued banking firm, but declined to say when other stock offerings would be made.
The chairman estimated that the FDIC`s losses in the rescue of Continental ultimately will amount to $1 billion. He said this is less than 3 percent of the assets the bank had when failure threatened. In most other cases, the FDIC has suffered losses of 10 percent or more of assets, he said.
Seidman also disclosed it is likely that, in spite of the sale, the FDIC will exercise an option for another 40 million shares of outstanding Continental common stock.
This will occur because the FDIC`s losses on bad loans it assumed likely will exceed $800 million, he said. The ownership of these shares will be determined in three years. If control goes to the government, all the shareholders of Continental before its 1984 rescue will have been virtually wiped out, Seidman said.
The FDIC`s announcement begins a long process of returning the bank to private hands. Continental was saved from certain failure when the agency pumped $1 billion of new capital into the bank and took $3.5 billion of bad loans off its hands. The bank can transfer another $694 million in loans by next September.
Continental said a registration statement will be filed with the Securities and Exchange Commission soon, Seidman said. A bank source said he expected the filing to take place next week.
Proceeds of the sale will go to the FDIC.
”During the past two years, Continen-tal has worked its way out of a heavily borrowed position and strengthened its liquidity,” Seidman said.
”Continental now has one of the highest capital ratios of any large bank in the country.”
He praised the bank`s leadership for the progress, saying the FDIC has not interfered with its operating decisions. ”We do not, and have not, `run the bank,` ” he said.
Yet, he said, ”the longer the FDIC owns the bank, the more troublesome it might be.” He cited criticism from the bank`s competitors that Continental had unfairly used its subsidized status to purchase several small financial institutions in Illinois.
”We sympathize with that,” Seidman said. ”On the other hand, we own that bank as a trustee for the insurance fund. We`re going to have a large loss on the transaction. As a trustee, it`s our obligation to maximize the value of that bank, because that will enhance the insurance fund, which will be for the benefit of all the other banks around the country.”
Seidman said the offering will amount to about 30 percent of the 32 million shares of junior convertible preferred stock owned by the FDIC, each of which is worth five shares of common stock when transferred to the FDIC.
”We recognize the size of the proposed public offering is relatively modest,” he said. ”But we are attempting to balance two, possibly competing, goals–a quick privatization of Continental and maximum recovery of deposit insurance fund outlays.”
With the sale, the FDIC will still own preferred stock equal to 110 million common shares, plus the likely ownership of an additional 40 million shares. ”Over time, we expect these holdings will also be returned to the private sector,” he said.
Continental got into trouble because of losses on energy loans resulting from the Penn Square Bank failure in 1982 and because of heavy reliance on
”purchased money,” large certificates of deposit that could be removed quickly.
Its improvement has been steady. On Wednesday, it announced a net profit of $41.1 million for the three months ending Sept. 30. Its net income for the first nine months of the year totaled $121.7 million, up 8 percent from a year earlier.
A week ago, Continental went back to the capital markets to raise money for the first time since 1981. Its offering of $150 million in notes was raised to $175 million because of a stronger than expected response.
In addition to the partial FDIC public offering, some observers have suggested that the FDIC might pursue two other options. It might permit Continental to buy back a large block of its stock, or have a foreign bank buy a major portion of it.
Goldman, Sachs & Co. is acting as investment adviser to Continental, while the FDIC has retained Morgan Stanley & Co. as its investment banker.
Executives of several large foreign banks have said privately that they have been approached by the investment banking firms concerning a possible purchase of Continental.
The head of one major overseas bank, who asked not to be identified, said he declined the offer because he felt Continental`s problems were still too big for most institutions to cope with.
