WASHINGTON — When President Obama announced Thursday that he was nominating Penny Pritzker to head the Commerce Department, he praised her "extraordinary experience" in the real estate, finance and hospitality industries. What he didn't mention was her past as a banker.
That omission was no accident. Until Superior Bank's collapse in July 2001, Pritzker was actively involved in the management and oversight of the $2.1 billion-asset thrift — and regulators blamed her family for its failure.
In retrospect, Superior Bank's downfall should have been an alarm bell for regulators, Congress and the public that banks weren't equipped to deal with the risks of subprime lending. Many of the root causes of its collapse now sound familiar, including rapid growth in subprime assets combined with liberal underwriting, deficient management systems, unreliable loan-loss provisions and a "nonresponsive management to supervisory concerns," according to a Treasury Inspector General report in 2002.
Pritzker was at least partially responsible for several of those problems. Her family owned a substantial part of the Hinsdale, Ill., thrift and she took an active role in its management.
Her involvement with the thrift began in December 1988, when the Pritzker family, along with New York real estate developer Alvin Dworman, purchased the troubled Lyons Savings Bank, with Penny Pritzker serving as chairman starting in 1991.
Under her leadership, Superior in 1993 "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. That strategy proved to be devastating.
Pritzker stepped down as chairman in 1994, but the thrift continued that business plan and she remained involved as a member of the holding company's board and the thrift's audit committee.
By 1999 the thrift's rapid growth in subprime assets had attracted the attention of regulators, with the Office of Thrift Supervision worried about possible inaccurate loss reserves and accounting for so-called subprime residuals, which are retained interests left over from the sale of high-risk loan pools. Regulators concluded after an exam in 2000 that the thrift was inaccurately calculating the fair market value of those assets, sparking a battle with its executives.
Regulators tried to force the thrift to write down the value of certain subprime assets, but the institution and its board, which included Pritzker, fought back. After a battle with Superior's outside auditor, Ernst & Young, the thrift and its board of directors, regulators eventually forced Superior to write down $270 million in subprime assets in early 2001, which resulted in the thrift becoming undercapitalized.
The holding company — controlled by the Pritzkers and Dworman — agreed to recapitalize the thrift. But in July 2001, the Pritzkers abruptly told the OTS they were no longer going to honor the agreement. The OTS and FDIC tried to force the Pritzkers back to the table, but eventually the thrift agency shut Superior.
In the aftermath the OTS repeatedly blamed the Pritzkers and Dworman for the thrift's failure, with then-Director Ellen Seidman testifying in Congress in 2001 that the owners should not have walked away from the recapitalization deal.
Although the Pritzkers denied culpability, the family in December of that year agreed to pay $460 million as a result of the failure — still the largest such settlement of its kind.
