Penny Pritzker’s Subprime Banking Scandal

The articles below were written in 2008 when Penny Pritzker was the Finance Chair of Obama’s presidential campaign. Now that she will be appointed to head the Department of Commerce, the scandal should get a closer look. The bank she chaired, Superior Bank in Chicago, targeted poor and working class people of color across the country with subprime mortgages. Pritzker ended up crashing Superior for a billion dollar cost to tax payers, and creating a personal tragedy for the 1,400 people who lost their savings when the bank failed.

For more information see:  A Gross Violation of IMPLIED TRUST by the Guardians of Superior Bank: OTS, FDIC, House Banking and the Media

Obama’s Sub-Prime Conflict

By Dennis Bernstein
Consortium, News, February 28, 2008

 

I remember my first piggy bank: a little pink piggy, made of plastic, with a little slot at the top. The slot was big enough, perhaps, to fit a half dollar, a great deal of money to me at the time.

 

I tallied up my stash—close to five dollars, I recall— and decided what I would do with my small fortune. I bought a kite, and my imagination soared even higher than my beautiful Chinese box-kite as to what I would save up for next.“A penny earned is a penny saved,” my father told me, as we dropped the first few coins into the opening, and I heard them hit bottom and bounce. And I can’t tell you how excited I was when we broke it open, after a year or so, and I couldn’t fit another penny into the slot.

My pop gave me a powerful push in the right direction, when it came to savings: A penny saved really was a penny earned.

Unfortunately, this wasn’t the case for the 1,406 people who lost much of their life savings when Superior Bank of Chicago went belly up in 2001 with over $1 billion in insured and uninsured deposits. This collapse came amid harsh criticism of how Superior’s owners promoted sub-prime home mortgages. As part of a settlement, the owners paid $100 million and agreed to pay another $335 million over 15 years at no interest.

The uninsured depositors were dealt another blow recently when the U.S. Supreme Court let stand a lower court decision to put any recovered money toward the debt that the bank owners owe the federal government before the depositors get anything.

But this seven-year-old bank failure has relevance in another way today, since the chair of Superior’s board for five years was Penny Pritzker, a member of one of America’s richest families and the current Finance Chair for the presidential campaign of Barack Obama, the same candidate who has lashed out against predatory lending.

During a recent campaign stop in south Texas, Obama met with San Antonio-area residents who had been particularly hard hit by the sub-prime meltdown. He expressed dismay over how lobbyists for the sub-prime lending industry had spent more than $185 million in the last several years for their cause.

“To give you a sense of what that kind of lobbying gets you,” Obama said, a “CEO of the largest sub-prime lender was promised a $100-million severance package at a time when more than two million Americans were facing foreclosure, including nearly 14,000 right here in San Antonio.”

Though Superior Bank collapsed years before the current sub-prime turmoil that is rocking the world’s financial markets – and pushing those millions of homeowners toward foreclosure – some banking experts say the Pritzkers and Superior hold a special place in the history of the sub-prime fiasco.

“The [sub-prime] financial engineering that created the Wall Street meltdown was developed by the Pritzkers and Ernst and Young, working with Merrill Lynch to sell bonds securitized by sub-prime mortgages,” Timothy J. Anderson, a whistleblower on financial and bank fraud, told me in an interview.

“The sub-prime mortgages,” Anderson said, “were provided to Merrill Lynch, by a nation-wide Pritzker origination system, using Superior as the cash cow, with many millions in FDIC insured deposits. Superior’s owners were to sub-prime lending, what Michael Milken was to junk bonds.”

In other words, if you traced today’s sub-prime crisis back to its origins, you would come upon the role of the Pritzkers and Superior Bank of Chicago.

One Failure to the Next

Superior was founded at the tail end of 1988 in the wake of the failed Lyons Savings Bank. The Feds were trying to keep a lid on the magnitude of the S&L post-deregulation crisis and were selling failed or failing thrifts for a song, along with a lucrative package of special benefits.

Chicago’s billionaire Pritzker family and their partners bought Lyons Savings for a quite reasonable $42.5 million, but were also given $645 million in tax credits. The kicker was that the buyers only had to come up with $1 million in cash, and got access to the $645 million, and all the bank’s deposits insured by the Federal Savings and Loan Insurance Corporation (FSLIC).

The Pritzker family’s Superior Bank “started life with enormous tax benefits and a substantial amount of FSLIC-guaranteed assets under a FSLIC assistance agreement,” said financial consultant Bert Ely in a Oct. 16, 2001, statement before the U.S. Senate Committee on Banking, Housing and Urban Affairs.

Ely stated, “Superior’s trick, or business plan” under Penny Pritzker’s leadership was apparently “to concentrate on sub-prime lending, principally on home mortgages, but for a while in sub-prime auto lending, too.” In December 1992, the Pritzkers acquired Alliance Funding, a wholesale mortgage organization.

In a 2002 article in In These Times about Superior Bank’s collapse, business writer David Moberg reported that the bank’s operations were “tainted with the hallmarks of a mini-Enron scandal…And yet the bank’s owners, members of one of America’s wealthiest families, ultimately could end up profiting from the bank’s collapse, while many of Superior’s borrowers and depositors suffer financial losses.”

Moberg wrote that “the Superior story has a familiar ring. … Using a variety of shell companies and complex financial gimmicks, Superior’s managers and owners exaggerated the profits and financial soundness of the bank. While the company actually lost money throughout most of the ’90s, publicly it appeared to be growing remarkably fast and making unusually large profits. Under that cover, the floundering enterprise paid its owners huge dividends and provided them favorable loans and other financial deals deemed illegal by federal investigators.

“Superior’s outside auditor, which doubled as a financial consultant, engaged in dubious accounting practices that kept feckless regulators at bay. Many individuals—disproportionately low-income and minority borrowers with spotty credit records—had apparently been exploited through predatory-lending techniques, including exorbitant fees, inadequate disclosure and high interest rates.”

When it collapsed in 2001, Superior Bank represented the largest failure of a U.S.-insured depository institution for a decade.

“The failure of Superior Bank was directly attributable to the Bank’s Board of Directors and executives ignoring sound risk management principles,” said FDIC Inspector General Gaston Gianni Jr. in a Feb. 7, 2002, report.

Banking whistleblower Anderson noted that “Superior failed at a time of historically low interest rates, high employment, a strong economy, and a growing housing market. … There was no reason for it to fail unless you consider gross negligence, a flawed business plan, and a conspiracy to deceive the regulators who were clearly asleep and were negligent themselves in their duties of protecting the class of underinsured depositors.”

Pioneering Work

Anderson said the bank owners and board members used Superior for their pioneering work in sub-prime lending, developing the financial instruments that helped set the stage for the current sub-prime meltdown.

“The Pritzkers like to say they did sub-prime lending to help the disadvantaged get into the home equity business, [but] it would be more accurate to state they ran a very large nation-wide predatory lending operation,” Anderson said, citing criticism of Superior’s lending practices in a letter written to the Office of Thrift Supervision on July 3, 2002, by the National Community Reinvestment Coalition, an association of more than 600 community-based organizations that promote access to basic banking services.

As an owner and board chair of Superior, Penny Pritzker also was named in a RICO class action suit on behalf of the more than 1,400 depositors at Superior, who initially lost over $50 million of their life savings.

“This is a story of two Americas with two sets of laws, one for the rich and powerful and another for the rest of us,” said Clint Krislov, the depositors’ attorney, in a recent interview. “My clients will all be dead, before they get back their money, given the Supreme Court’s recent decision to uphold the lower court, which put the predatory owners on the front of the line, if any money is recovered.”

The Pritzkers arrayed a powerful and well-connected legal team including former President Bill Clinton’s impeachment lawyer Lanny Davis, two ex-comptrollers of the currency, and two former General Counsels to the FDIC, the American Banker Magazine reported.

Given the political sensitivity of the sub-prime mortgage crisis, Anderson said he believes Penny Pritzker should resign her post as Obama’s Finance Chair, the person who oversees the campaign’s fundraising.

Otherwise, Anderson said, Pritzker’s presence could undercut Obama’s credibility on the issue of predatory lending and create a possible conflict of interest if Obama is elected President and tries to crack down on sub-prime abuses.

Obama campaign spokesman Tommy Vietor had no comment about the controversy surrounding Pritzker, but added: “Barack Obama has already made it very clear that he’s going to crack down on fraudulent brokers and lenders.”

One might wonder why Hillary Clinton’s campaign hasn’t jumped on this issue. Maybe it’s because Penny’s little brother, J.B. Pritzker, is a mover and shaker in the Clinton campaign.

In May of 2007, Jay Robert, aka, (J.B.) Pritzker, threw his support behind Hillary Clinton, representing a coup for her campaign by wresting the billionaire out of Obama’s home town of Chicago, and better still, the brother of Obama’s Campaign Finance Chair.

J.B. Pritzker announced he would head a new grassroots organization called Citizens for Hillary Clinton. Pritzker told reporters at the time, the new organization would go into states “where we haven’t fully organized” and seek out campaign supporters as well as raise funds.

Apparently the Pritzkers will be sitting at the head table at the Inaugural Ball if either Democrat wins.

Dennis Bernstein is an award-winning investigative reporter and public radio producer. He is co-host and executive producer of the daily radio news magazine, Flashpoints, on Pacifica Radio, and a contributing editor to the Pacific News Service.

A Top Obama Fund-Raiser Had Ties to Failed Bank

For the Pritzker family of Chicago, the 2001 collapse of subprime-mortgage lender Superior Bank was an embarrassing failure in a corner of their giant business empire.

[Penny Pritzker]

By JOHN R. EMSHWILLER
Wall Street Journal, July 21, 2008

Billionaire Penny Pritzker helped run Hinsdale, Ill.-based Superior, overseeing her family’s 50% ownership stake. She now serves as Barack Obama’s national campaign-finance chairwoman, which means her banking past could prove to be an embarrassment to her — and perhaps to the campaign.

Superior was seized in 2001 and later closed by federal regulators. Government investigators and consumer advocates have contended that Superior engaged in unsound financial activities and predatory lending practices. Ms. Pritzker, a longtime friend and supporter of Sen. Obama, served for a time as Superior’s chairman, and later sat on the board of its holding company.

Sen. Obama has long criticized predatory subprime mortgage lenders and urged strong actions against them.

In a prepared statement, the Obama campaign noted that Ms. Pritzker was never accused of wrongdoing by regulators in connection with Superior, and that her family agreed to pay $460 million to help defray the costs of Superior’s collapse.

In a written response to questions, Ms. Pritzker said the reasons for Superior’s fall “were complex. They include changes in accounting practices, auditing failures, reversals in regulatory positions and general economic conditions.” During her tenure at the thrift, she said, she believed it followed “ethical business practices” and complied with “fair lending laws.” For years, she said, Superior’s financial statements were found to be acceptable by regulators.

The Obama campaign recently faced a controversy related to mortgage lending. A member of Sen. Obama’s vice-presidential selection committee resigned after a Wall Street Journal story said he received favorable treatment on personal loans from Countrywide Financial Corp., a major subprime lender.

Ms. Pritzker’s connection to Superior dates to the late 1980s, when the late Jay Pritzker, her uncle and then the family patriarch, moved to buy from federal regulators a troubled Illinois savings and loan. Ms. Pritzker, who has law and business degrees from Stanford, was to be the venture’s chairman, said Mr. Pritzker’s partner on the deal, New York real-estate developer Alvin Dworman, in a December 2006 deposition. “Jay bought the bank for her,” he said in the deposition, taken in connection with litigation in Illinois state court related to the collapse. Mr. Dworman declined a recent interview request. Ms. Pritzker, in her statement, said she never heard her uncle mention her as a reason for the purchase.

Ms. Pritzker served as Superior chairman until 1994. During that period, Superior “embarked on a business strategy of significant growth into subprime home mortgages,” which were then packaged into securities and sold to investors, according to a 2002 report by the Treasury Department’s Inspector General.

“Superior was at the forefront of the securitizing of subprime mortgages,” says Timothy Anderson, a retired bank consultant who has studied Superior and other failed thrifts.

Ms. Pritzker said her “main role” as chairman was to help clean up past financial problems. “I did not set strategy or policies” on lending or securitization, she said. In 1994, she moved to the board of Superior’s holding company.

Through the 1990s, Superior reported rising profits and paid $200 million in dividends to its owners, according to a 2002 report by the inspector general of the Federal Deposit Insurance Corporation. But the profits came through “flawed” accounting and masked operating losses, the FDIC report said. The dividend payments were made “without regard to the deteriorating financial and operating condition.”

Ms. Pritzker said that she didn’t have a personal financial interest in her family’s investment, and only received “nominal” directors’ fees.

In 2001, under regulatory pressure, the Pritzkers agreed to a $351 million recapitalization plan, which would help “once again restore Superior’s leadership position in Subprime lending,” Ms. Pritzker wrote in a May 31, 2001, letter to employees.

The Pritzker name lent credibility. In June 2001, Fran Sweet deposited about $480,000 of retirement funds with Superior. The 64-year-old former telephone-industry employee recalls that when she asked if Superior was sound, an official told her, “Don’t worry. The Pritzkers own it.”

By July 2001, the recapitalization plan had unraveled and regulators took over Superior. It was the biggest thrift collapse in nearly a decade.

Later that year, the Pritzkers reached a settlement with regulators. Without admitting wrongdoing, they agreed to pay $100 million immediately, and another $360 million over 15 years. “I am proud of how I and my extended family dealt with” Superior’s closure, Ms. Pritzker said.

Superior’s failure could still cost the federal deposit insurance fund tens of millions of dollars or more. And hundreds of people whose deposits exceeded federal insurance limits, such as Ms. Sweet, are still out millions of dollars, which will be reduced some by future Pritzker settlement payments.

Write to John R. Emshwiller at john.emshwiller@wsj.com

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