Thrift’s Troubles Noted in 1999
Problems at Superior Bank were detected by federal regulators as early as January 1999 and it then took nearly two years for the regulators and the Chicago-area thrift to work out a plan for addressing its shortcomings, according to government officials and documents.
The troubles at Superior, which was taken over by the government last Friday, were long wrapped in secret negotiations between regulators and bank managers. Superior’s acknowledgment that assets had been overvalued by $117.9 million only became public in a March 2001 financial report.
The Office of Thrift Supervision “should have moved a lot faster than they did,” said Bert Ely, a private banking consultant who has studied Superior’s finances.
Scott Albinson, managing director of supervision at the thrift agency, said, “We acted as quickly as we thought possible in this situation.”
The collapse of Superior is expected to drain the federal insurance fund of about $500 million, making it one of the costliest involving a U.S. financial institution in the last decade.
The failure of Superior is at the center of a drama with four major players with divergent interests: the government; the multibillionaire Pritzker family of Chicago, owners of Hyatt Corp.; the family’s 50-50 partner in Superior, New York developer Alvin Dworman; and the thrift’s auditors, Big Five accounting firm Ernst & Young.
It probably will take the regulators months to unravel what happened and who may be to blame. It could lead to lawsuits against some of the principals, as happened during the savings and loan crisis of the late 1980s and early 1990s that required a massive government bailout.
Federal regulators will conduct “an exhaustive review of everything that went on at the institution,” the OTS’ Albinson said. “We will devote any resources it takes to get to the bottom of this.”
The Pritzkers, with Dworman as their partner, had bought a financially troubled thrift--then named Lyons Savings Bank--at the height of the savings and loan crisis in 1989 for a discounted $100 million, or $50 million each.
The Pritzkers, through their spokesmen, maintain that Dworman has failed to repay a $100-million loan from Superior’s holding company, Coast-to-Coast Financial Corp., from March 1996, plus about $30 million in interest. But Dworman said he had a deal with friend and family scion Jay Pritzker, who died in 1999, that doesn’t obligate him to repay.
The Federal Deposit Insurance Corp. raised concerns about Superior in early 1999 to the Office of Thrift Supervision. An FDIC spokesman, who asked not to be identified, said Tuesday that the FDIC asked the thrift agency to let it participate in a January 1999 examination of Superior because FDIC staff had found potential problems in analyzing bank data.
He said the thrift agency, a division of the Treasury Department, decided to examine Superior without the FDIC but that OTS staff “did discuss examination findings with us.”
Sam Eskenazi, a spokesman for the thrift agency, said the FDIC and OTS examiners collaborated closely and have worked together since January 2000 on every inspection of Superior.
As is customary, most of the work was done away from public scrutiny.
After the January 1999 exam, the OTS lowered its rating for Superior’s soundness, from a top rating of one to a slightly lower rating of two. In March 1999, the OTS examiners gave a “satisfactory” rating to the holding company, Coast-to-Coast Financial, and found that Superior was well capitalized, according to people familiar with Superior’s operations, who spoke on condition of anonymity. The ratings are not made public.
The profit of federally insured Superior grew in the 1990s from making high-interest home and auto loans to consumers with troubled credit histories who cannot qualify for better rates, attracting customers nationwide with television ads and telemarketing.
Superior bundled its high-risk home and car loans into securities for resale to investors. The thrift diluted the risk by packaging the loans together and paid a correspondingly lower interest rate to the investors than what it charged the borrowers with weak credit, recording the difference between the two rates as a profit on its books.
The problem arose because Superior, in doing that accounting, made overly optimistic assumptions regarding how many borrowers might default on loans or prepay them as interest rates dropped, the regulators say.
