WASHINGTON - Senate Banking Committee Chairman Paul Sarbanes and Office of Thrift Supervision Director Ellen Seidman clashed Tuesday at a hearing over who was to blame for the failure of Superior Bank.
Sen. Sarbanes said regulators should have detected signs of the thrift's demise earlier, and he pressed for what more regulators could have done. Ms. Seidman faulted the institution's owners, management, and outside ac-countants.
Ms. Seidman revealed that the agency has already issued 27 subpoenas in its investigation of Superior's collapse, and that it is in intensive discussions with the General Accounting Office and two federal inspector generals, which are also looking into the failure.
Though acknowledging that the agency could have done things differently, she dug in her heels when it came to claims that the OTS was to blame for the failure. In an unusually tense exchange, she repeatedly interrupted Sen. Sarbanes as he asked whether the agency should have known earlier that Superior was a problem institution.
At one point Sen. Sarbanes seemed to lose his patience. "You don't have to be overly defensive - just try to address these issues," the Maryland Democrat said. It is not an adequate response to a particular problem situation to say to me, 'Well, we've done well in all these other instances,' if in fact you were deficient in handling this instance. It's relevant to say this agency is not a complete flop, but I'm not asserting that."
Sen. Sarbanes said he agreed with analyst assertions that the OTS and the Federal Deposit Insurance Corp. should have known that Superior - whose failure could cost the Bank Insurance Fund at least $500 million - was an unusual institution engaged in risky activity.
"If you are sitting there telling us, 'Well, we did everything right, and even a couple years before this thing fell flat on its face, we started to move,' what does that say about our process?" Sen. Sarbanes said. "Are we going to have another Superior that comes down the same way? It seems to me there were all types of signals that this outfit was outside anything approximating normal parameters for activity in the industry. That seems to me to be very apparent, long before it was in desperate straits."
But Ms. Seidman said the blame fell on Superior's owners, who suddenly walked away from a recapitalization plan, leaving the thrift critically undercapitalized. She accused the thrift's management and its accounting firm, Ernst & Young, of bogging down the OTS in an extended dispute over the proper valuation of so-called subprime residuals - retained interests left over from the sale of high-risk loan pools.
When Superior finally changed its accounting of residuals in January 2001, it left the thrift dangerously undercapitalized, she said.
In several recent failures, the institution's management and accountants purposely dragged out such disputes to delay regulatory action, Ms. Seidman said.
"This is currently a relatively low-risk proposition for institution management and its accountants; the longer the dispute goes on, the longer the institutions can avoid booking the inevitably higher reserves or lower asset values the regulator is demanding," she said.
"In most cases these disagreements are resolved relatively amicably. … However, where the consequences of the regulator's position are large, as where it could cause the institution to drop a capital category, which is very much the issue [with Superior], delay is often the winning strategy."
She recommended the enactment of a law that would allow regulators to issue an "accounting dispute letter" over differences that could cause a bank or thrift to drop a capital category and start a 60-day clock for resolving the problem. If the dispute is not resolved after 60 days, the regulator's position should be adopted for regulatory reporting purposes, Ms. Seidman said.
Furthermore, at least two people in the outside accountant's group should understand the complexities of the primary business lines of an institution they are reviewing, she said. "This may not have been the case with the Superior accountants."
Ms. Seidman and John Reich, a board member and former acting chairman of the FDIC, said that the agencies would finalize a proposal by the end of the month that would institute dollar-for-dollar capital charges on residual interests, and that it would be part of a recourse rule, which has been in the works for more than eight years.
Sen. Sarbanes expressed skepticism about whether the rules would be released that quickly, and he questioned why, more than two years after the collapse of First National Bank of Keystone in West Virginia, which was caused partly by the bank's concentration in residual assets, the residual rule in particular had not been enacted yet. Ms. Seidman responded that the regular interagency process was very time consuming, and that it was hard to get all the agencies to agree on a final rule.
Sen. Sarbanes also said he would look carefully at the plan currently being developed by an interagency working group on the proper use of the FDIC's backup exam authority. Regulators formed the group last month, because the FDIC's request to participate in a January 1999 exam of Superior was rejected.
While Ms. Seidman characterized that denial as extremely rare, Mr. Reich said the FDIC needed more authority to examine any bank that, in its judgment, represented significant exposure to the deposit insurance funds.
From Our Archive
Superior Protested Get-Tough Approach - August 8, 2001 Failure of Superior Turns Quickly Into Blame Game - July 31, 2001 Regulators Close Superior After Investor-Led Bailout Falls Short - July 30, 2001
