Superior Bank & Trust The thrift financial Institution Superior Bank & Trust is one of the largest. It is located in Chicago and has many branches eighteen of which can be found in the Chicago area. It is owned by one of Chicago’s wealthiest families the Pritzkers and Alvin Dworman a well-known real-estate investor from New York. With assets totaling $2. 3 billion and deposits of $1. 6 billion Superior Bank FSB got caught up in some problems with sub prime loans.
This was their main focus. Sub prime lending is lending to people who are poor credit risks. They lend money or issue credit cards at high interest rates. Many companies have prospered using this method but most have gone under due to rising default rates and early prepayments by borrowers who can refinance at lower rates. Superior Bank & Trust’s failure was directly related to sub prime lending. Regulators were believed to have detected problems as early as January 1999.
These regulators should have been the ones to step in and notice that things weren’t going the way they should have been. Instead Superior’s management is bearing the brunt of the blame in this situation. Ellen Seidman states ‘responsibility for the success or failure of any depository institution rests with its management, directors, and owners.’ This may be true but if management and financial intermediaries had been performing their tasks properly they would have noticed that there where parties involved in their credit system that they didn’t know enough about to make accurate lending decisions on. They should have noticed that their clientele accumulated as a result of adverse selection. They weren’t given an option. They were picking the best of the worst.
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Management and owners should have questioned the intentions of their customers. They should have been aware that their clients might have only been accepting high interest rates because the likelihood of the loan being paid back was almost nonexistent. As time progressed Superior Bank & Trust fell into deep financial arrears. As this became blatantly obvious regulators began to take action.
A rescue plan was suggested. Pritzkers and Dworman were to back the company by putting almost $200 million into it. Plus Pritzkers would have to put up $155 million to cover possible losses from loans packaged as securities and sold to investors and would have become exclusive owners of Superior. This did not happen. When the capital fell regulators put restrictions on the institutions asset growth.
This happened when the company’s leverage capital was 4% or less, or their risk capital was less than 8%. Closure wasn’t to far away. If the company’s capital didn’t improve within 90 days Superior Bank & Trust would be closed. At the time of closing Superior had $42.
9 million potentially uninsured deposits held by nearly 1, 000 depositors. Because of this the FDIC will contact customers with uninsured deposits an have them make appointments with an FDIC claims agent. The FDIC will give a $1. 5 billion line of credit to a new Superior and sustain continued business operations.
Superior Bank and Trust failed due to the errors on the part of financial intermediaries, its management, and owners. Financial intermediaries and management overlooked faults within the system, and the owners had the chance to save the company with monetary distributions but ‘walked away’ from the opportunity. If all had been doing their jobs the company may have been saved. The lesson to be learned by the failure of Superior Bank and Trust is not to think that you are to big to fail, or to take risks that are unnecessary. Therefore, in conclusion I would say that all parties involved were at fault.
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