Today's banking crisis demonstrates that keeping our banks safe is the President's highest responsibility. If our banks are collapsing, we can't pay our bills, and our government can't fund health care, fight wars to defend us, rebuild our roads, or make our cities safe from hurricanes and other natural disasters.
Franklin Roosevelt's first "fireside chat" famously began, "I want to talk for a few minutes with the people of the United States about banking." Our next President's first words to the nation are also likely to be "about banking." So which man do we want to be talking to us about banking in January 2009? Obviously, we want someone who understands why banks fail, because he'll be able to keep our banks safe.
Which makes it all the more significant that Barack Obama has posted on his campaign website a naive and ignorant defense* of his campaign finance chair, Penny Pritzker, concerning her key leadership involvement in the largest bank failure in the 18 years between the last great banking crisis (the 1980s S&L debacle) and today's even-more-massive banking crisis. The excuses, misdirections, and spin Senator Obama offers in defense of this billionaire failed bank executive are Pritzker spin from start to finish, and expose Obama's profound inability to understand why banks fail and how to keep banks safe.
Seldom has the special access of the wealthy into the inner deliberations of a Presidential candidate been more clearly exposed by the candidate himself. Just as the press is "in the tank" for Obama, Obama is in the tank for Pritzker. And a man in the tank for Pritzker cannot keep our banks safe.
THE BANK FAILURE I REFER to is the 2001 failure of Superior Bank, right in Senator Obama's Chicago hometown. Superior Bank, a part of the $15 billion, 1,500-company "Pritzker Family Business Unit" as testified under oath by Glen Miller, a key manager of the "FBU," was the biggest bank failure of the early 2000s, losing hundreds of millions of dollars.
Superior Bank failed because of the same problem that is bringing down all the banks now: subprime loans. Who got the bank into those loans? Obama's own finance chair, Penny Pritzker. Sworn deposition testimony puts Penny Pritzker not only on the board of the bank and its holding company, Coast, but personally leading the meeting to persuade regulators to let the bank into the subprime market.
You have Enron-style accounting that hid the real asset values, two disgraced bank executives under her supervision whom the government forced out of the banking industry with official cease-and-desist orders, a Department of Justice Expert Report placing the blame squarely on the executives and owners, and the Pritzkers agreeing to pay $460 million over 15 years to escape government lawsuits and sanctions.
This all happened in Illinois while Obama was an Illinois state senator. What did he know about it? According to his website, the accountants were to blame. Should a presidential candidate accept such an excuse from a failed bank owner? On 60 Minutes last Sunday (Sept. 21), Senator Obama blamed the current banking crisis on "greedy CEOs and investors taking too much risk." Well, Senator, you've got one of those "greedy CEOs and investors taking too much risk" financing your campaign, and writing your website for you, passing the buck to the accountants.
Superior's failure was studied by the United States Treasury Department and by banking regulators in special Inspector General reports, and has been documented in the open files of the Court of Federal Claims, available to Obama throughout his term as a U.S. Senator. Did he ever read any of them? Apparently Senator Obama's friendship with Penny Pritzker -- and her billions of dollars -- caused him not to look into any of these reports and documents to understand why, during a period in which almost no banks of any size failed, Penny Pritzker's bank failed so massively that she and her family agreed to pay $460 million. And failed right in Senator Obama's hometown.
Obama on his website writes that Penny Pritzker and her family paid the $460 million essentially out of the goodness of their hearts.
The United States Department of Justice, in official court filings, offers a different explanation:
The Pritzker Family Pays Money to Settle Proposed Charges Arising from the Failure of Superior: In order to stave off a lawsuit by the FDIC against the directors and officers of Coast and Superior, and possibly other entities within the "Family Business Unit," the Pritzkers settled with the thrift regulators in late 2001. [Coast-to- Coast Financial Corp. v. United States of America, U.S. Court of Federal Claims case number 95-525, Department of Justice Cross-Motion for Summary Judgment, 25 Feb. 2004 (corrected), at p. 21, and appendix of documents at pp. 2897-98.]
A Presidential candidate serious about understanding why banks fail ought to read the conclusions of the United States Department of Justice concerning the failure of the bank run by his own campaign fundraiser, before promoting that failed bank executive's spin on his official campaign website for millions of Americans to be tricked by.
A LARGE COLLECTION of documents exposing highly significant parts of the story is open to anyone who walks in off the street, set out in the case files of
Coast-to-Coast, in the clerk's office of the United States Court of Federal Claims in Washington. The case was one of 120 similar breach-of-contract cases called "Winstar-Related Cases" arising out of the legislation adopted to resolve the last great banking crisis, of the 1980s. And the case was one of the cases my law firm and I were involved in, until it was thrown into a cocked hat by the bank's massive failure, when the FDIC stepped in and took over representation of the bank, leaving me representing just the holding company, Coast.
The United States Department of Justice turned all its energies to proving how the owners and managers destroyed the bank. We were unable to defend the management misconduct. All we could do was argue that Coast was entitled to get a recovery anyway. Of course, we lost. The case ended four years ago, along with all my past connections to the company. I haven't thought about the case in years.
But when this current banking crisis blew-up a couple of weeks ago, I saw that the press was doing nothing to investigate the bank failure involving such a close Obama associate. Like a detective in the TV series Cold Case, I recognized that this "cold case file" had to be re-opened and shown to the American people.
I went back to the clerk's office on Friday, Sept. 19, 2008. The key United States Department of Justice expert reports and sworn depositions were all there, and have been sitting there, free for anyone to read and copy, for more than four years. I re-read them, copied some of the key reports and depositions, took the copies home, scanned them, and posted them on-line where you can read and download them here.
THE ENORMOUSLY WEALTHY and powerful Pritzker family acquired the bank late 1988 when it was Lyons Savings of Hinsdale, Illinois (termed "Old Lyons"). Superior Bank and its holding company, Coast-to-Coast, became part of the vast empire of 1,500 Pritzker-controlled companies, trusts, partnerships, and other entities, worth about $15 billion in 2003, that comprise the Pritzker "family business unit" (FBU). In 2003, Pritzker lieutenant Glen Miller (one of the four people who ran the Pritzker family business unit) testified that the Pritzker family acquired Superior and Coast "in the interests of developing a financial services business that would house ultimately vertically and horizontally-integrated businesses: banking, mortgage, auto leasing, auto lending, etc., as it would grow." Superior and Coast were "entities within the FBU that posed a unique opportunity to do [in]vesting in the most tax efficient way" by taking the losses of Old Lyons and using them to shelter the profits of other Pritzker family investments from tax.
Penny Pritzker was on the board of directors of the bank through much of its existence, and on the board of the bank's 100% holding company, Coast-to-Coast, throughout the collapse of the bank.
Under Pritzker's leadership on the board of the bank, the bank was wholly unable in 1989-1992 to succeed at the traditional business of safe loans. To increase profits, Pritzker and the board decided to move the bank into the risky field of subprime lending. Bill Bracken, chief financial officer of the bank, confirmed under oath that "Superior Bank become associated with the sub-prime lending business...with the combination of Alliance [a subprime mortgage generation firm] and Superior in 1992."
Penny Pritzker took the lead in convincing the regulators to allow the bank to get into this risky business. Bracken was present at a key meeting with regulators in late 1992:
Q: Did you meet with regulators in connection with the application to combine Superior and Alliance?
A: I believe there was one meeting where I was involved. There were several board members, senior management from both companies, to explain to regulators how we saw the marriage taking place and the benefits of it. ...
Q: Was Penny Pritzker there?
A: I think so. I think she was. ...
Q: Just getting back to that meeting with the OTS...how do you recall the meeting proceeding? Did someone make a presentation and the regulators sat there and listened?
A: It was obvious to me that there had been a previous discussion when we walked into the room because it was -- a booklet was handed out. Somebody -- I'm trying to think who gave the presentation. I think Penny actually gave the presentation.
Q: Ms. Pritzker?
A: Yeah. Why we're doing this and what we see the benefits from it and it wasn't that long of a presentation. They basically relied on the -- the booklet.
Although Penny Pritzker later left the board of the bank, she remained on the board of the holding company, Coast. As Bracken explained, "it was mostly a time issue with her being on both boards. And with everything else she had going on with the Pritzker organization, she needed to be able to reduce her time commitment to the bank. And by maintaining -- I believe she maintained her presence on the Coast-to-Coast board and thus being able to see everything that was going on at the bank at the same time."
Superior bank executive Nelson Stephenson testified that Pritzker remained on the Coast board through his departure in January 2001:
Q: Was Penny Pritzker on the board when you left [22 Jan. 2001]?
A: Of which entity?
A: Yes, I believe she was.
Pritzker's role as the Pritzker family point-person on Superior was well known. Shortly after the death of her father, Jay Pritzker, one Paul Merrion, writing in Investment News on Feb. 22, 1999, stated that "Penny Pritzker, 39, Tom [Pritzker]'s first cousin...oversees industrial real estate and the family's interest in Coast-to-Coast Financial Corp., the Las Vegas-based parent of Superior Bank FSB, a $1.1-billion-asset thrift based in Oakbrook Terrace, Ill."
AN INDEPENDENT BANKING expert, Rodolfo Engmann, was hired by the United States Department of Justice to analyze in detail who and what caused Superior Bank to fail. Engmann reviewed "numerous public studies [of Superior's failure in July 2001] by various government agencies, including the Federal Deposit Insurance Corporation (FDIC) Office of Inspector General, the General Accounting Office, and the Department of the Treasury Office of Inspector General."
Contrary to the story on Obama's website, Engmann makes clear that Superior should have known on its own that its accounting overvalued its risky assets, and that regulators told Superior it should change its accounting.
Engmann explains that improper accounting inflated Superior's risky assets by $420 million. The inflation came in two parts. One, amounting to $150 million of inflated value, had nothing to do with the outside accountants. The bank's managers arbitrarily changed the discount rate they used concerning residual cash flows from 15% to 11%. As Engmann reports, "when asked by the regulators to provide support for this reduction in the discount rate, Superior could not provide sufficient documentary support. Therefore, in May 2001 the regulators required that Superior increase the discount rate back to 15% and the values of the residual interests were adjusted downward by $150 million in July 2001."
The second part amounted to $270 million of inflated value. Engmann reports that:
In 1995, Superior, CCFC [Coast, where P. Pritzker was on the board], and Fintek began to structure Superior's securitization transactions to include OC accounts [overcollateralization accounts].... However, Superior, CCFC, and Fintek failed to properly apply GAAP [generally accepted accounting principles] in its accounting for the OC accounts, resulting in an overstatement of the value of these residual assets.... In December 1998 and July 1999, the [Financial Accounting Standards Board] clarified that the "cash out" method was the appropriate method to estimate the fair value of the OC credit enhancement accounts.... In Superior's structure, both the Financial Receivables and the OC assets served as credit enhancement assets, therefore the "cash out" method for determining fair value was appropriate.
But the bank persisted in using a different method, "cash in." Regulators blew the whistle, but bank managers stopped up their ears: "During the January 2000 examination [of Superior and CCFC], the OTS and the FDIC questioned the accounting treatment for valuing the OC accounts.... However, both Superior/CCFC management and [Ernst & Young's] Chicago-based audit team continued to take the position that the OC accounts should be accounted for on an undiscounted basis."
Regulators were forced to take the matter "upstairs":
[T]he OTS, in August 2000, requested that E&Y's Chicago-based audit team contact E&Y's national office to verify that the accounting treatment of the OC accounts was correct. In January 2001, E&Y's national office acknowledged that the undiscounted "cash in" accounting treatment applied by Superior to the OC accounts was improper (thus agreeing with the regulators) [parenthetical in the original] and proposed an overall revaluation of the residual assets in accordance with the discounted, 'cash out' method. The revaluation ultimately resulted in a $270 million downward adjustment in the carrying value of the OC accounts, with a corresponding reduction in equity capital.
Thus, contrary to the Pritzker spin Obama hosts on his campaign website, the accountants did not suddenly and unexpectedly change their minds. Instead, official accounting guidance from the Financial Accounting Standards Board was published no later than July 1999 that Superior ought to have applied on its own; when regulators saw this was not happening, they pushed Superior to correct its accounting, but Superior refused, and the Chicago-based auditors went along; finally the regulators told them to take it up with the accountants' national headquarters; and Superior finally obeyed the accounting rules in May 2001, after almost two years of resistance.
Engmann wraps up the sorry tale: "The two accounting treatments, relating to the OC account and the discount rate, resulted in Superior's assets and capital being overvalued by a total of $420 million. ... This overstatement by management of Superior, CCFC, and Fintek masked the actual declines in income and capital resulting from the worse than projected performance of the securitization deals. Taking these adjustments into account, the cumulative reported 'Revenue from Sale of Loans' of $409 million would have been reduced to a deficit of $11 million."
And what happened to the two key executives who Penny Pritzker approved as managers of Superior after she led Superior into the risky subprime market? The regulators at the Office of Thrift Supervision forced Nelson Stephenson and William Bracken not only out of Superior, but out of the banking industry altogether, issuing "cease and desist" orders against each of them in August 2002.
The questionable accounting artificially propped-up the asset values and enabled Superior Bank to pay $201 million in dividends to Coast. When the accounting fiction could no longer be maintained, did Penny Pritzker at least offer to pay back the dividends? Not according to the Department of Justice:
As a result of negotiations [in early 2001] with thrift regulators, the Pritzkers tentatively agreed to infuse assets worth approximately $200 million into Superior. [Glen] Miller Depo[sition] at pp. 383-84. However, Penny Pritzker discussed with Mr. Miller her view that Coast had no obligation to infuse any capital into Superior, and that board members had placed great reliance on their accountants, who had now apparently determined that their prior opinions were in error. [Government Appendix at pages] 2982-94, 2497-98 (Miller [deposition]). Given these apparent misgivings, and, according to Mr. Miller, realizing that the family might be called upon for additional capital in the future, the Pritzkers declined to proceed with the recapitalization, and Superior was seized by the OTS on July 27, 2001. [Cross-motion for summary judgment, 25 Feb. 2004 (corrected), at 20.]
And ultimately, as noted above, when Superior Bank failed and its top two executives were forced out of the industry by cease-and-desist orders, the Pritzker family paid $460 million to escape similar actions against her and other Pritzker executives responsible for Superior Bank's collapse.
Engmann concludes that Superior Bank failed because the management and board of Superior Bank and of its holding company Coast (which included Penny Pritzker) led Superior Bank "to concentrate its assets too heavily in high-risk, residual assets resulting from securitizing and servicing subprime loans" which "significantly decline[d] in value," but that the "use of certain accounting treatments...masked the declines in the value of the residual assets until 2001."
Engmann also notes that the bank "paid $201 million of dividends to its parent [Coast, where Penny Pritzker was on the board] that reduced [Superior Bank's] capital" and that the bank "incurred negative cash flows which contributed to its failure."
Engmann reports that the owners and managers of Superior Bank ignored repeated warnings by government bank regulators that they were loading-up the bank with too-risky assets. Engmann quotes OTS examination report warnings in the reports dated July 6, 1993; August 8, 1994; September 11, 1995; October 27, 1997; and January 24, 2000.
Because Superior Bank's owners, including Penny Pritzker, ignored these prominent warnings from regulators, the government ultimately was forced to seize the bank.
OF COURSE, AS A BANK OWNER and manager, Penny Pritzker ought to have recognized and corrected the high-risk problems in her bank without receiving any government warnings at all. Certainly a serious and reliable candidate for President would not choose as a key member of his campaign a bank director who needed repeated warnings from regulators before recognizing serious problems in her own bank. A serious and reliable candidate for President would certainly not choose someone who not only didn't see the problems on her own, but didn't act to solve those problems even after regulators repeatedly pointed out to her those problems.
Presidential nominee Barack Obama tells us that he will fix the banking system by imposing more regulation. Yet the person he chose to serve as his own campaign finance chief ignored the banking regulators who tried to rein in her own bank's out-of-control, profit-motivated risk-taking. And this was documented before he chose her, in numerous government studies as well as in public court filings, throughout Barack Obama's term as a Senator of the United States. Before he organized his run for the Presidency. Before he chose failed bank director Penny Pritzker to raise the funds for his campaign.
Our next President's first and most vital job on taking office in 2009 will be to solve today's severe banking crisis -- a crisis that former Fed Chair Alan Greenspan called a once-in-a-century banking crisis. Senator Obama offers America transparently false excuses about Penny Pritzker's key role in the more than $400 million failure of Superior Bank. He has been all too willing to be fooled into believing her excuses, into promoting her excuses to America, and to not investigate the facts of why her bank failed. Barack Obama is obviously not a man who, as a President, can be trusted to keep our banks safe.
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