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Tags: subprime | Penny Pritzker | Commerce Secretary | Senators

Subprime Mess Left by Commerce Secretary Nominee Pritzker Is Seen as Opening for Opponents

Wednesday, 22 May 2013 01:03 PM EDT

A 61-page report carrying the seal of the U.S. Treasury Department’s inspector general offers a tutorial for Republican senators interested in challenging Penny Pritzker’s commerce secretary nomination.

The document chronicles the 2001 failure of a suburban Chicago bank after Pritzker and her family expanded subprime lending there and did pioneering work with the kind of mortgage- backed securitization that would eventually spread and help spark the worst recession since the Great Depression.

When it closed, Superior was one of the nation’s largest bank failures in a decade. It remains the biggest business- record blemish for a woman who has developed a skyscraper, started a luxury senior housing enterprise and been chairwoman for a credit reporting company.

“She’s got more than 25 years of management experience in industries, including real estate, finance, and hospitality,” President Barack Obama said on May 2 as he announced her nomination. He didn’t specify her work in banking.

Pritzker, the Chicago businesswoman, philanthropist and Hyatt Hotels Corp. heiress who led record fundraising for Obama’s 2008 campaign, is scheduled to have her Senate Commerce Committee confirmation hearing tomorrow. Republicans have said she should expect tough questions about Superior, as well as her personal finances that include offshore accounts.

“Obviously, she was involved in an institution that failed, and appropriate questions will be asked,” said Senator John McCain, an Arizona Republican and Obama’s opponent in the 2008 presidential campaign.

The White House and Pritzker’s personal spokeswoman, Susan Anderson, declined to make the nominee available for an interview.

Complex Failure

“Superior’s failure was complex,” Pritzker said in a 2008 statement posted on Obama’s campaign website. “In short, the bank failed in 2001 because regulators concluded that the valuation of certain assets in Superior’s financial statements, which had been audited by Ernst & Young for many years and previously approved by regulators, was overstated and as a result the bank was not capitalized sufficiently.”

Anderson, in an e-mailed statement, said that in the early 1990s “subprime lending by reputable institutions greatly expanded home ownership for people with poor credit histories.”

The bank’s failure came near the start of Pritzker’s career. Other than her now-deceased uncle, then-family-patriarch Jay Pritzker, no family member had closer ties to the bank.

Top Executive

Four years after graduating with simultaneous law and MBA degrees from Stanford University in California, Pritzker became the bank’s top executive after Jay Pritzker and New York real estate investor Alvin Dworman purchased a distressed Illinois savings and loan in 1988 from regulators. It was a deal that included the right to more than $600 million in tax and other credits.

“Jay bought the bank for her,” Dworman said in a 2006 deposition for an Illinois state court case brought by uninsured depositors who have lost $10 million.

Pritzker, 54, who with a net worth of more than $1.5 billion would be among the wealthiest cabinet secretaries in U.S. history, was the bank’s chairwoman from 1991 through 1994. During that period, Superior “embarked on a business strategy marked by rapid and aggressive growth into subprime home mortgages and automobile loans,” according to the inspector general’s report.

It was the kind of lending that Obama often criticized on the 2008 campaign trail. After she stepped down as the bank’s head, Pritzker remained on its holding company’s board, including at the time of the failure.

$351 Million Plan

In a May 2001 letter to the bank’s management and employees — just two months before its closure — Pritzker detailed a plan to revive the institution with an expansion into subprime lending. She wrote that her family was devising a $351 million recapitalization plan for the bank.

“Your resolve and dedication is a primary reason for the past successes of the bank and will once again restore Superior’s leadership position in subprime lending,” she wrote. “Our commitment to subprime lending has never been stronger and we are fully expecting to participate in restoring the bank’s presence through strong product lines and continued growth.”

Anderson, the spokeswoman, said Pritzker’s involvement included “leading negotiations with representatives of the shareholders of the holding company, regulatory authorities and other constituencies who were affected” in the effort to recapitalize the bank.

Toxic Assets

The Pritzkers ultimately reneged on the deal with regulators to inject more capital after determining the toxic assets could be worth even less than they estimated. Officials seized Superior in July 2001, and its 17 branches and $1.1 billion of deposits were sold for $52 million to Charter One Financial Inc.

Throughout the 1990s, Superior had reported rising profits that allowed it to distribute about $200 million in dividends to shareholders, specifically the Pritzkers and Dworman, according to a February 2002 report by the inspector general of the Federal Deposit Insurance Corporation.

Clint Krislov, a Chicago attorney who represented depositors in both the state lawsuit and a federal one against the bank and Penny Pritzker among others, accused her family and Dworman of improperly taking those dividends based on an over- valuation of the bank’s assets.

“No one else appears to have taken a crashed bank and crashed it again and kept $200 million in profits,” said Krislov, who was unsuccessful in the lawsuit.

Record Payment

In December 2001, the Pritzker family agreed to pay a record $460 million to the U.S. as a result of the bank’s failure. In 2011, the Pritzkers got a discount on remaining payments of the 15-year deal by agreeing with regulators to pay off the balance early.

Pritzker has presented the agreement as something her family “voluntarily” offered. Krislov said that’s misleading.

“Other people were pursued by the FDIC into bankruptcy,” he said. “They bought themselves out of what might have been a very long, and rigorous and unfavorable process. If you have the money to make a significant contribution, I guess you get a go- pass card.”

Subprime loans typically are given to people with the weakest credit, charging higher interest to cover the bigger risk of default, and Superior’s collapse turned out to be a preview of the financial crisis that came later in the decade.

With $1.9 billion in assets as of March 2001, Superior became undercapitalized because it overstated its holdings and used shoddy accounting, the Office of Thrift Supervision said in a July 2001 statement.

Poor Practices

Superior “also suffered from poor lending practices, improper record-keeping and accounting, and ineffective board and management supervision,” the OTS said.

John Courtney, a former small business owner in the construction industry, was among the depositors who lost money and then unsuccessfully sued Superior Bank’s holding company and Pritzker.

Courtney, 68, said he had about $300,000 in certificates of deposit at the bank when it collapsed. That exceeded the $100,000 limit for FDIC coverage at the time.

“They pushed the name Pritzker like you wouldn’t believe when you went in the bank,” said Courtney, who claims he was repeatedly assured his deposits would be safe because the bank was owned by one of Chicago’s wealthiest families.

‘Soup Kitchen’

Courtney said he’s received payments beyond the amount technically covered by the FDIC $100,000 insurance cap, although he’s still out about $60,000. He remembers waiting outside one of the bank’s branches the week after its closing with dozens of other depositors worried about their money.

“It looked like a soup kitchen,” he said. “And the Pritzkers made money on the deal.”

In Courtney’s view, the bank failure should disqualify Pritzker from leading the commerce department.

“I just don’t know how this has all been overlooked,” he said. “The economy is in the condition it is right now, for a large measure, because of subprime lending.”

A February 2002 report by the General Accounting Office blamed the bank’s collapse on those who ran it.

“Primary responsibility for the failure of Superior Bank resides with its owners and managers,” the GAO said. “Its strategy resulted in a high concentration of extremely risky assets. This high concentration of risky assets and the improper valuation of these assets ultimately led to Superior’s failure.”

The thrift, with $2.3 billion in assets, used improper accounting and record-keeping, the report said.

Uninsured Claims

About 1,000 customers had about $43 million in potentially uninsured deposits, the FDIC said at the time of the failure. There were $10.2 million in uninsured deposit claims as of March 31, 2013, the regulator said.

Dworman, through spokesman Andy Merrill, declined an interview request about the bank’s failure.

In his 2006 deposition, Dworman presented himself as a mostly silent investor who dealt almost exclusively with Jay Pritzker until his 1999 death. He said Penny Pritzker played a leadership role at the bank amid the negotiations with regulators in 2001.

“Jay was dead,” he said. “There was nobody to talk to. The family decided that they should take over the bank. They had a meeting at the bank, told the employees not to worry. I saw a letter that Penny Pritzker wrote personally saying we are doing the bank deal.”

After the depositers’ court case ended unsuccessfully, Krislov said he wrote Penny Pritzker asking the family to cover the roughly $10 million in deposits not covered by insurance, an amount he now calls “pin money” for the family.

“I never got a response,” he said.

© Copyright 2023 Bloomberg News. All rights reserved.

A 61-page report carrying the seal of the U.S. Treasury Department’s inspector general offers a tutorial for Republican senators interested in challenging Penny Pritzker’s commerce secretary nomination.
subprime,Penny Pritzker,Commerce Secretary,Senators
Wednesday, 22 May 2013 01:03 PM
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