ECON-Bank's Troubles Leads Back To Early 1999

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Twisting Trail of Bank's Troubles Leads Back to Early 1999

By Marcy Gordon The Associated Press Published: Jul 31, 2001

WASHINGTON (AP) - Problems at Superior Bank were detected by federal regulators as early as January 1999, according to government officials and documents. It then took two years for the regulators and the Chicago-area thrift to work out a plan for addressing its shortcomings. The troubles at Superior, which was taken over by the government last Friday, were long wrapped in secret negotiations between regulators and bank managers. Superior's acknowledgment that assets had been overvalued by $117.9 million only became public in a March 2001 financial report.

The Federal Deposit Insurance Corp., which insures accounts up to $100,000, raised concerns about Superior in early 1999 to the Office of Thrift Supervision, an FDIC spokesman, who asked not to be identified, said Tuesday.

The new disclosures are the latest twist in the complicated story of the collapse of Superior, which is expected to drain the federal insurance fund of an estimated $500 million. Its failure could be one of the costliest involving a U.S. financial institution in the last decade.

The failure of Superior involves four major players: the government; the multibillionaire Pritzker family of Chicago, owners of Hyatt Corp.; the family's 50-50 partner in Superior, New York developer Alvin Dworman; and the thrift's auditors, Big Five accounting firm Ernst & Young.

Federal regulators will conduct "an exhaustive review of everything that went on at the institution," Scott Albinson, managing director of supervision at the Office of Thrift Supervision, said. "We will devote any resources it takes to get to the bottom of this."

The picture that emerges from interviews with people familiar with the situation shows federal regulators picking up signs of financial trouble at Superior as far back as January 1999. The drama culminated last Friday, when real estate executive Penny Pritzker flew to Washington as the family's attorneys prepared to negotiate with the banking regulators to try to stave off a shutdown of Superior, with $1.6 billion in deposits.

The Pritzkers, through their spokesmen, maintain that Dworman has failed to repay a $100 million loan from Superior's holding company, Coast-to-Coast Financial Corp., from March 1996, plus some $30 million in interest. But Dworman insists he had a deal with friend and family scion Jay Pritzker, who died in 1999, that doesn't oblige him to repay.

Superior grew in the 1990s by making high-interest home and auto loans to consumers with troubled credit histories, attracting customers nationwide with television ads and telemarketing. The practice, known as subprime lending, has become increasingly popular in recent years and is a focus of regulators' concerns.

Like many other banks and thrifts, Superior bundled its high-risk loans into securities for resale to investors. The thrift diluted the risk by packaging the loans together and paid a correspondingly lower interest rate to the investors than what it charged the borrowers with weak credit, recording the difference between the two rates as a profit on its books.

The problem arose because Superior made overly optimistic assumptions regarding how many borrowers might default on loans or prepay them as interest rates dropped, the regulators say.

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On the Net:

Federal Deposit Insurance Corp.: http://www.fdic.gov

AP-ES-07-31-01 1907EDT

-- Anonymous, July 31, 2001


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