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SHADOW BANKING 

tential runs on even larger banks that reportedly may have lacked sufficient assets to
satisfy their obligations, such as First Chicago, Bank of America, and Manufacturers
Hanover. 
During a hearing on the rescue of Continental Illinois, Comptroller of the Cur-
rency C. Todd Conover stated that federal regulators would not allow the  largest

“money center banks” to fail. This was a new regulatory principle, and within mo-
ments it had a catchy name. Representative Stewart McKinney of Connecticut re-
sponded, “We have a new kind of bank. It is called ‘too big to fail’—TBTF—and it is a
wonderful bank.” 
In , during this era of federal rescues of large commercial banks, Drexel
Burnham Lambert—once the country’s fifth-largest investment bank—failed. Crip-
pled by legal troubles and losses in its junk bond portfolio, the firm was forced into
the largest bankruptcy in the securities industry to date when lenders shunned it in
the commercial paper and repo markets. While creditors, including other investment
banks, were rattled and absorbed heavy losses, the government did not step in, and
Drexel’s failure did not cause a crisis. So far, it seemed that among financial firms,
only commercial banks were deemed too big to fail.
In , Congress tried to limit this “too big to fail” principle, passing the Federal
Deposit Insurance Corporation Improvement Act (FDICIA), which sought to curb
the use of taxpayer funds to rescue failing depository institutions. FDICIA mandated
that federal regulators must intervene early when a bank or thrift got into trouble. In
addition, if an institution did fail, the FDIC had to resolve the failed institution in a
manner that produced the least cost to the FDIC’s deposit insurance fund. However,
the legislation contained two important loopholes. One exempted the FDIC from the
least-cost constraints if it, the Treasury, and the Federal Reserve determined that the
failure of an institution posed a “systemic risk” to markets. The other loophole ad-
dressed a concern raised by some Wall Street investment banks, Goldman Sachs in
particular: the reluctance of commercial banks to help securities firms during previ-
ous market disruptions, such as Drexel’s failure. Wall Street firms successfully lobbied
for an amendment to FDICIA to authorize the Fed to act as lender of last resort to in-
vestment banks by extending loans collateralized by the investment banks’
securities. 
In the end, the  legislation sent financial institutions a mixed message: you
are not too big to fail—until and unless you are too big to fail. So the possibility of
bailouts for the biggest, most centrally placed institutions—in the commercial and
shadow banking industries—remained an open question until the next crisis, 
years later.