WASHINGTON - Senate Banking Committee Chairman Paul S. Sarbanes is asking for federal investigations into the failure of Superior Bank FSB, a suburban Chicago thrift that was half-owned by the multibillionaire Pritzker family.
Sarbanes, a Maryland Democrat, requested the probes in letters dated Wednesday to the General Accounting Office, the government's main investigative arm, and the inspectors general of the Treasury Department and the Federal Deposit Insurance Corp. He said investigators also should explore "whether and how the regulatory early warning system is working." He released the letters yesterday.
"I'm very much concerned about this failure," Sarbanes said yesterday during a hearing on deposit insurance. "It's a timely reminder of the potential exposure eventually to the taxpayer."
The closely held Superior Bank was seized by federal regulators Friday, becoming the largest U.S. depository institution to fail since 1992. The thrift's collapse might boost deposit insurance overhaul proposals put forth by the FDIC, the Depression-era agency that insures $3 trillion in U.S. bank and thrift deposits.
In a key change, the FDIC wants banks and thrifts to pay premiums in good times and bad to protect depositors against loss for up to $100,000 per account. Now, only the weakest companies pay premiums, because the deposit insurance funds hold enough money to cover 1.25 percent of deposits, as required by law.
Superior Bank, with assets of $2.3 billion and deposits of $1.6 billion, was declared insolvent by its main regulator, the Office of Thrift Supervision, which said losses on home and car loans to people with tarnished credit had depleted its capital. Estimates of the impact of the Superior Bank failure on the deposit insurance funds range from $500 million to $1 billion.
"I say this not to be alarmist, but I would urge caution against becoming complacent in good times," said South Dakota Democrat Tim Johnson.
Sarbanes asked the agencies to investigate what caused the Superior Bank failure and the effectiveness of the regulators' onsite examinations and offsite monitoring of the thrift.
"Reports concerning this failure have raised concerns about the concentration and valuation of residual interests, the reliability of internal and external accounting, the underwriting of subprime loans and allegations of insider lending," Sarbanes wrote.
He wants the investigators to look at profit transfers and other transactions among the thrift, its holding company, Coast to Coast Financial Corp., and other affiliates. Regulators' efforts to detect fraud and insider lending should be probed, Sarbanes wrote.
Another issue that should be examined is the levels of concentration and amount of valuation in residual interests held by Superior Bank and more generally the treatment of residuals by Superior's main regulator, the Office of Thrift Supervision, Sarbanes wrote.
Sarbanes also questioned the "effectiveness of the implementation" by regulators of the Federal Deposit Insurance Corp. Improvement Act. The 1991 law created new capital and examination standards for banks and thrifts, and directed regulators to resolve failures promptly and at the least cost to the deposit insurance fund.