WASHINGTON - Senate Banking Committee Chairman Paul Sarbanes is expected to take regulators to task at a hearing next month on the failure of $2.3 billion-asset Superior Bank FSB.

Sources said the Maryland Democrat is in discussions with regulators and is expected to call Office of Thrift Supervision Director Ellen Seidman and a representative of the Federal Deposit Insurance Corp. to testify. Both will surely face tough questions about the spectacular implosion of the Hinsdale, Ill., thrift, which was shut down July 27 after the collapse of its recapitalization plan.

An OTS spokesman confirmed that preliminary discussions about a hearing were underway, but said the agency had received no formal request to testify. An FDIC spokesman said that it too had yet to be formally asked to testify, but confirmed that Sen. Sarbanes sent the agency a letter this week wanting more information on the failure.

A spokesman for Sen. Sarbanes did not return phone calls seeking comment, but sources said the hearing has been tentatively scheduled for Sept. 11.

Though lawmakers are likely to ask wide-ranging questions, Sen. Sarbanes is expected to focus on whether the failure demonstrates the shortcomings of "prompt corrective action" - a series of rules, contained in the FDIC Improvement Act of 1991, that require regulators to take increasingly severe actions against an institution as its capital declines.

The powerful committee chairman raised the issue in an Aug. 1 letter to the General Accounting Office when he requested the agency investigate the thrift's collapse.

"I request that the GAO review the implementation of the Prompt Corrective Action Provisions of" the 1991 law, "especially the effectiveness in preventing losses to the insurance funds," Sen. Sarbanes wrote. "The magnitude of the loss in this case raises questions about the effectiveness and implementation of FDICIA by the financial regulators and warrants an examination by your agency."

Also expected at the hearing are inquiries as to why the OTS kept the FDIC from examining Superior two and a half years ago, and about the interactions between the two agencies during the thrift's downfall. The FDIC said two weeks ago that it was denied access to a January 1999 exam of Superior, and that when it received a report on the thrift a few months later, it downgraded its rating. Some analysts have said that Superior's failure might revive calls to give the FDIC more backup examination authority.

The OTS has insisted that it shared information all along with the FDIC, and worked together with the agency since Superior was identified as troubled more than a year ago.

Ms. Seidman could face tough questions about her own previous statements on the subject. During a House Banking Committee hearing on bank failures early last year, Ms. Seidman said her agency has always cooperated with the FDIC.

"We have one policy - the door is always open," Ms. Seidman testified then. "We have told our regional directors that whenever the FDIC asks to go into a thrift, that request must be honored … A second set of eyes is a benefit when an institution is showing signs of stress, and in numerous instances we have sought out FDIC participation in examining a problem institution."

Banking Committee members are also likely to question why the agencies took so long to shut down Superior, and to scrutinize the role of the thrift's accountants, Ernst & Young. The firm had originally signed off on the valuation of Superior's subprime residuals - a notoriously hard asset to value that has been at the root of other banks' failures. Ernst & Young later reversed its valuation, forcing Superior to write down more than $100 million.

Senators may also delve into why the recapitalization plan failed. The OTS has said that it closed the thrift because it was critically undercapitalized after the owners walked away from an investment plan that would have restored the institution.

Superior's owners have partially disputed that assertion, with the prominent Pritzker family arguing that falling asset valuations had made the plan moot, and representatives of New York developer Alvin Dworman saying that they had always been willing to carry out their part.

Superior is the largest thrift to fail in more than five years, and its collapse is expected to cost the Savings Association Insurance Fund more than $500 million.


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