Continental Illinois Corp. has pumped millions of dollars into a subsidiary that is a leading lender to stock options traders and that has suffered substantial losses from the market collapse this week, a Continental spokesman confirmed yesterday.
Regulators and congressional sources said yesterday that the subsidiary -- First Options of Chicago Inc. -- needed the new capital to avert a possible failure stemming from the losses.
Continental spokesman Edgar McDougal refused to comment on the possibility of a failure, noting only that an options firm cannot operate without adequate capital.
He said the infusion of new capital to First Options was made Wednesday, but he would not say how many millions of dollars are involved.
Continental is a bank holding company whose main subsidiary is Continental Illinois National Bank & Trust Co.
The bank bought First Options for $125 million a year ago, making it the first big bank to jump full force into the options market.
In 1984, Continental Illinois was saved from the brink of collapse by a $4.5 billion government rescue plan that at the time was the largest federal banking bailout in history. The bank has regained its health, but the federal government still owns 60 percent of its stock.
First Options profits from commissions on the trades that it processes for various customers, including many traders on the floor of the Chicago Board Options Exchange who deal in stock options -- the right to buy or sell stock at a specific price at a future date. It also profits by lending money to traders to help finance stock and options positions. The options traders were at the center of the huge stock market fluctuations that have rocked Wall Street this week.
Clearing operations can be risky because of the possibility that traders who have borrowed money will suffer losses and require additional capital to hold into their options. In certain cases, if traders go broke, First Options must absorb the losses.
Regulators emphasized that the money lent to First Options comes from the bank holding company and not the bank itself -- an important distinction that avoids federal laws limiting how much money a bank can lend to a single borrower.
Because of the government's stake in Continental, many of the bank's competitors criticized federal regulators for allowing the bank to buy a new subsidiary, especially one tied to the relatively risky area of options trading.
If First Options were to collapse, Continental Illinois could lose the $125 million it spent to buy the options firm and it could lose at least $35 million in additional loans it has made to the firm.
Federal regulations limit how much money banks can lend to one borrower. When Continental bought First Options, bank regulators said the bank would have to treat the subsidiary like any other borrower and be subject to the same lending restrictions.
Continental Illinois' loans to First Options "are at or near" those limits, according to a spokesman for the Office of the Comptroller of the Currency, the federal agency that regulates Continental.
The comptroller's office refused to "bend the rules" and allow Continental Bank to exceed those limits, according to one congressional aide. Federal regulators worked this week to find another source of funding and were happy with the solution of using the bank holding company rather than the bank itself as that source.
The bank holding company used money it had raised through unsecured bonds issued to fund the general operations of the company.
The regulators stressed that First Options' troubles in no way threaten the renewed health of Continental Illinois.
Continental Illinois' purchase of First Options has been watched closely by those who favor and those who dislike a 54-year-old federal law that separates securities underwriting from commercial banking. The federal law, however, does permit banks to lend money to people or firms that invest in or execute trades in securities, including options.