What Change Will Obama Make?

Penny Pritzker

One of the richest women in America and, since the spring of 2008, Barack Obama’s national finance chair, Penny Pritzker is the granddaughter of Abram Nicholas Pritzker, founder of the Hyatt hotel chain. In 1991, she was named chair of the family-owned Superior Bank of Chicago, but stepped down in 1994. However, she continued to serve on the board until the bank’s collapse in July 2001.

As banking attorney and former Arnold & Porter partner Edward Sisson reveals in a devastating critique in The American Spectator, the collapse of Superior Bank was the largest bank failure in the eighteen years between the savings and loan debacle of the 1980s and the current banking crisis. In fact, it was a period in which almost no bank of any size failed. According to Sisson, “the failure was so massive that she and her family agreed to pay $460 million” in order to stave off a lawsuit by the FDIC against the officers and directors of Coast-to-Coast (its holding company), and Superior. Penny Pritzker served on the boards of both entities. The case and its settlement is amply documented in Federal Court of Claims filings by the United States Department of Justice.

As Sisson explains, Superior was unable to succeed in the traditional business of safe loans. In order to increase its profits Pritzker and the board decided to move into the risky field of subprime lending. According to documents in the court file, bank CEO Bill Bracken confirmed under oath that “Superior Bank became associated with the subprime lending business with the combination of Alliance [a subprime mortgage generation firm] and Superior in 1992.”

The U.S. Department of Justice hired an independent banking expert, Rodolfo Engmann, to analyze in detail who and what caused the failure of Superior Bank. Engmann reviewed numerous public studies of Superior’s 2001 failure, including those of the FDIC, the Office of Inspector General, the General Accounting Office, and the Department of the Treasury Office of Inspector General. Engmann concluded that Superior should have known on its own that its accounting overvalued its risky assets [in fact by over $420 million], and that regulators told Superior that it should change its accounting practices.

According to Engmann, $150 million of this overvaluation was caused when the bank’s managers arbitrarily changed the discount rate they used concerning residual cash flows from 15% to 11%. Pressed by regulators for documentation for this change in the discount rate, Superior was unable to comply. This forced the regulators to demand that Superior increase the discount rate back to 15%, thereby reducing the value of its residual assets downward by $150 million.

Engmann reported that an additional $270 million in inflated value was attributed to Superior’s failure to apply generally accepted accounting principles [GAAP] to its securitization transactions to include OC accounts [overcollateralization accounts]. This resulted in an overstatement of the value of these residual assets. Despite cautions by the Financial Accounting Standards Board, Superior persisted in using a ‘cash in’ method of accounting. When Superior was finally told by regulators and its own accounting company, Ernst & Young, to employ the ‘cash out’ method of valuing its residual assets, it resulted in a $270 million downward adjustment in the carrying value of the OC accounts.

As a consequence of Superior’s failure, its two top officers, Nelson Stephenson and William Bracken were not only forced out of Superior but out of the banking industry altogether by means of cease and desist orders issued by the Office of Thrift Supervisor. The Pritzker family paid $460 million to escape similar actions being taken against her and other Pritzker executives responsible for the bank’s collapse. According to Engmann, the owners and managers of Superior ignored repeated warnings by regulators that they were loading up the bank with too-risky assets, warnings issued in 1993, 1994, 1995, 1997, and 2000.

Why should any of this matter? It matters because Penny Prizker is Barack Obama’s national finance chair and because the Obama’s campaign website has posted an explanation of Pritzker’s involvement in the Superior Bank failure which is in total contradiction of the facts as revealed in the government regulators’ own documents. As Sisson explains, “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.” It clearly exposes the fraudulent nature of Obama’s “change” mantra and the depth of his financial and ethical incompetence.

Obama and his Democratic allies would have you believe that the banking crisis was created by a lack of regulation when, in fact, much of it was caused by a failure to adhere to the current regulatory framework. Obama has chosen as his national finance chair a woman directly responsible for a massive bank failure because she and her associates failed repeatedly to heed warnings of federal regulators. He has received thousands of dollars in campaign contributions from her.

This incident demonstrates that the subprime lending crisis was caused by a combination of incompetence, corruption and greed, much of it also encouraged by a political climate which attempted to encourage home “ownership” among those who lacked the credit history or financial resources to make their mortgage payments.

How are we to get a handle on this banking crisis unless we first comprehend why it took place? In this instance, Barack Obama comes across as an empty suit too willing to look aside when those next to him are among those most responsible. And to not only look aside, but to actively defend their behavior on his website and provide them with a forum to promote their excuses. There’s no question that Barack Obama is a gifted speaker. But more than any candidate in recent American history, he has the ability to sound impressive while saying nothing of substance. His relationship to Penny Pritzker provides glaring evidence of this.

Sisson should know. He spent several years of his professional life involved in a variety of breach-of-contract cases, called Winstar-Related Cases, which arose from legislation adopted to resolve the 1980s banking crisis. The case involving Coast-to-Coast, and, thus, Superior, was one of those cases, until the bank’s failure and FDIC’s takeover of Superior left Sisson’s firm representing just one company, Coast. He knows whereof he speaks. His article was prompted by the media’s inattention to fact that Obama, for political and financial reasons, has come to the defense of Pritzker. The article is Sisson’s attempt to set the record straight.

More on Pritzker:

Article on "Loan Modification & Home Loan News"
A blog article
Wikipedia