Pritzkers in Record Thrift Settlement
In the biggest settlement ever extracted from owners of a failed savings and loan, the billionaire Pritzker family and its partner have agreed to pay federal regulators $460 million to help cover losses at an Illinois thrift that collapsed this summer after losing millions of dollars on high-risk loans.
The agreement, announced Monday, resolves claims brought by the Federal Deposit Insurance Corp. against Superior Bank of Hinsdale, Ill., which in July became the largest U.S. financial institution to fail in nearly a decade.
The institution, with $2 billion in assets, became an embarrassment for its wealthy owners--the Pritzkers of Chicago, who control the Hyatt Corp. hotel chain, and New York developer Alvin Dworman, whose properties include the Bacara resort near Santa Barbara.
Although admitting no liability, the Pritzker and Dworman interests, which had 50-50 ownership in Superior, agreed to help regulators investigate potential wrongdoing by the Ernst & Young accounting firm. Ernst & Young had audited Superior’s books, blessing the thrift’s overly optimistic estimates of values of interests it retained in risky loans sold to investors. Superior’s losses totaled about $500million.
A source close to the Pritzkers said they will pay the entire amount of the settlement but have reserved the right to sue Dworman for damages. In a statement, the Pritzker family said that it initiated the settlement talks and that the agreement reflected the family interests’ “historical commitment to stand by their investments.”
Dworman could not be reached for comment.
The Pritzkers and Dworman have blamed each other for the demise of Superior. The Pritzkers also have said Ernst & Young bore at least part of the blame. Ernst & Young spokeswoman Catherine Svoboda declined to comment on the settlement or the firm’s work for Superior.
Bank regulators said $100 million of the settlement was paid Monday, with the rest due over 15 years at no interest. Allowing for the effect of paying over time, the deal’s value, in current dollars, was estimated at $335 million. “It is a huge amount, like having a third of a billion dollars handed to you,” said consultant Bert Ely, who testified about Superior to the Senate Banking Committee in October.
Donald Powell, chairman of the FDIC, which reached the agreement in concert with the Office of Thrift Supervision, said the settlement amount is easily a record for a single institution. Powell said the speed with which the agreement was reached “is equally impressive.”
The largest combined settlement previously reached in the case of a failed institution was $235.4 million from accountants, lawyers and other advisors to Lincoln Savings of Irvine, probably the most notorious thrift failure of the 1980s. The accounting firm defendants in that case included Arthur Young & Co., Arthur Andersen & Co. and Deloitte & Touche. The Lincoln bailout cost taxpayers $2.6 billion.
Junk bond financier Michael Milken and his Drexel Burnham Lambert Inc. brokerage, which were allied closely with Lincoln and other thrifts, paid $1.1 billion in 1992 to settle charges related to the S&L; debacle. But that settlement covered 44 institutions.
Superior was seized July 27 by federal regulators, who found it had lost nearly all its assets and had engaged in poor lending practices, inadequate supervision of employees and poor record keeping. Superior specialized in loans to the subprime market, which includes borrowers with poor credit.
Superior has been operating under the control of the FDIC, which insures accounts up to $100,000. The government is selling off Superior bit by bit. Charter One Bank of Cleveland recently agreed to pay $52.4 million for the thrift’s $1.1 billion in deposits and 17 branches in the Chicago metropolitan area. Still up for sale are Superior’s high-rate mortgage loan business and a loan-servicing operation.
The practice of lending to people with shaky credit has come under scrutiny recently amid a souring economy, which sent delinquencies higher, and charges of predatory lending. Bank of America quit the business, saying it was too unpredictable, and credit card specialist Providian Financial Corp. of San Francisco was required to quit by regulators after a huge upsurge in delinquencies.
The estimated $500-million cost of paying off Superior’s depositors recalls the huge losses S&Ls; suffered on real estate, bonds and other risky deals in the 1980s.
The current economic downturn raises issues of whether accountants covered up or failed to detect financial problems at battered companies.
The most prominent recent case involves a Securities and Exchange Commission investigation of accounting and disclosure practices of Enron Corp., the Houston energy trader that filed for bankruptcy protection after admitting it overstated its financial strength for the last four years. The SEC investigation includes Andersen, Enron’s accounting firm.
Ely said the Pritzker-Dworman team purchased Superior, the former Alliance Federal, in 1988 from the government, which had seized Alliance.
The new owners enjoyed big tax benefits from buying the thrift and paid themselves $186 million in dividends from 1992 through 1999, Ely said.
The Pritzker-Dworman team will receive 25% of damages collected from Ernst & Young, their agreement with regulators specifies. The government will get 75%.
