President Barack Obama’s choice to be the new secretary of commerce is a powerful Democratic fundraiser and hometown friend whose family’s role in a controversial bank failure might raise questions during her Senate confirmation.
Obama announced his nomination of billionaire Penny Pritzker in a Rose Garden ceremony Thursday, along with his nomination of national security aide Michael Froman to head the Office of the U.S. Trade Representative. The president described both as longtime friends, joking that Froman was a law school classmate who was “much smarter than me then. He continues to be smarter than me now.”
The more controversial pick is Pritzker, who runs an investment company and a real estate group and sits on the board of the Chicago-based Hyatt Hotels Corp. chain, founded by her uncle. Her net worth approaches $2 billion.
The Chicago resident served as the campaign finance chairwoman for Obama’s 2008 national campaign, and she’s donated tens of thousands of dollars of her own money since 1997 to the Democratic National Committee, political action committees and individual campaigns.
“Penny is one of our country’s most distinguished business leaders,” the president said. “She’s got more than 25 years of management experience in industries including real estate, finance and hospitality. She’s built companies from the ground up.”
Her financial and political background might cause problems for her confirmation by the Senate, however.
She was accused of being anti-union during her time on the Chicago school board. Chicago Teachers Union officials told the Chicago Tribune in March that Pritzker had a “long and storied history” of being anti-union and anti-worker, both on the school board and on the Hyatt board.
More problematic might be her family’s role in Superior Bank, a thrift that was seized by the Federal Deposit Insurance Corp. in July 2001 and was half owned by the Pritzker family. The case at the time represented one of the largest lender failures since the late 1980s.
The Pritzkers and business partners bought the lender from the government during the resolution of the savings and loan crisis. The new Superior Bank pioneered the packaging of subprime loans into complex securities, and its failure was an early warning about the financial crisis that would unfold in 2008.
“The Pritzkers didn’t want to just make money, they wanted to make some big money,” said Tim Anderson, a retired Chicago-area bank consultant whose probing of Superior garnered attention in 2003.
Superior’s failure was the subject of an inquiry by the Senate banking committee in late 2001. Then-FDIC Director John Reich said in written testimony that “increasing levels of high-risk subprime assets” at Superior had worried regulators, who began scrutinizing it and seized it after the Pritzkers and partners “failed to implement the capital plan” worked out with regulators.
In a settlement with federal regulators, the Pritzker family and other bank co-owners agreed to pay regulators $100 million right away and another $360 million over 15 years.
“I am proud of how I and my extended family dealt” with the matter, Pritzker told The Wall Street Journal in a July 21, 2008, article.
The White House said Thursday that she wasn’t personally involved.
“Penny was not an officer or director of Superior when it failed,” spokesman Eric Schultz said. “She left that board in 1994, seven years before the bank failed. During her chairmanship and for years afterwards, the bank received clean audits from Ernst & Young and received high marks from federal regulators.”
About $281 million in depositors’ money initially was deemed uninsured by the FDIC at the time of the seizure, and lawsuits dragged on for years. On April 4, 2008, Clinton Krislov, an attorney for depositors who weren’t made whole, wrote Pritzker asking for a good-faith $10 million payment to depositors.
“While I acknowledge that you are not obligated to do this, it seems like something you might want to consider,” he wrote, appealing to Pritzker’s sense of justice. There was no response, he said.
Krislov said he hoped the Senate would ask tough questions of Pritzker.
“I would choose someone who had built a business and was knocking down trade barriers for American businesses, rather than someone who was just a great fundraiser,” he said Thursday. “Typically we reserve the top jobs for people like that. Instead, this is a message that wealthy people are still getting benefits that the rest of us don’t get. They got a pass, a deal with Superior Bank, which appears to have left them with $200 million in profit. . . . It shouldn’t be like that with a failed bank.”
Subprime loans packaged into complex securities by Superior and later big Wall Street investment banks went on to become a major cause of the U.S. financial crisis of 2008.
A McClatchy review of FDIC documentation of Superior’s seizure and subsequent assets sale found that EMC Mortgage Corp. acquired the right to manage Superior’s portfolio of outstanding subprime mortgages. EMC was a wholly owned subsidiary of the now-disgraced investment bank Bear Stearns, a major packager of subprime loans into complex securities. Bear’s hasty sale, brokered by the Federal Reserve on March 16, 2008, was the opening act to the worst U.S. financial crisis since the Great Depression.
Froman would succeed Ron Kirk, who left the post in February, and sensitive trade talks with Asian nations and Europe will be on his plate almost immediately if he’s confirmed.
“His nomination could not come at a better time, as the U.S. begins trade and investment talks with the European Union and pursues the Trans-Pacific Partnership,” said Peter Robinson, the president of the pro-trade U.S. Council for International Business.