The recent failure of Superior Bank, expected to cost the deposit insurance fund -- and thus American taxpayers -- some $500 million, will be dissected by federal agency watchdogs and congressional investigators following a request by the Senate Banking Committee's chairman.

Sen. Paul Sarbanes, D-Md., said the collapse of the Chicago-area thrift raises concerns about its high-rate mortgage and auto loans to borrowers with tarnished credit and the reliability of its accounting methods.

Superior, owned 50-50 by the multibillionaire Pritzker family and New York developer Alvin Dworman, was closed July 27 by federal regulators, who determined it had engaged in poor lending practices, inadequate supervision of employees and sloppy record keeping. The thrift, with some $2.3 billion in assets, was reopened July 30 under control of the Federal Deposit Insurance Corp. (FDIC) as Superior Federal FSB.

"By transferring operations to New Superior, the FDIC will be better able to effect an orderly resolution with little to no disruption to insured depositors and other customers," said John Reich, acting FDIC chairman. "Our goal is to have this institution back in private hands before year's end."

At the time of closing, Superior Bank had about $42.9 million of potentially uninsured deposits held by about 1,000 depositors, according to the FDIC.

In a letter Aug. 1 to the inspector general of the FDIC, which insures accounts up to $100,000, Sarbanes said, "Given the role of the FDIC in promoting and preserving public confidence in our financial depository institutions, I request that you review why the failure of Superior Bank resulted in such a significant loss to the deposit insurance fund and make recommendations for preventing any such loss in the future."

The inspector general, Gaston Gianni, said Aug. 3 that Superior's failure raises many important questions, such as the causes of the debacle and its potential cost to the federal insurance fund.

Under a law enacted in response to the savings and loan crisis, regulators are required to act promptly when a bank or thrift's capital reaches dangerously low levels.

Sarbanes also wants the General Accounting Office (GAO), Congress' investigative arm, to examine the Superior case as well as other banks and thrifts with similar problems and to determine how well the regulators' oversight is working.

He also sent a request to Treasury Department Inspector General Jeffrey Rush Jr., whose office already is looking into the Superior failure under a rule requiring such an inquiry whenever the federal insurance fund loses $25 million or more. Sarbanes asked that Rush provide the report to Congress.

Rush said Aug. 3 that his report will be completed within six months, as required by law, and will be submitted to Congress.

The inspectors general are independent of the federal agencies they monitor.

The decision to close Superior was made by Treasury's Office of Thrift Supervision, which has undertaken its own review of the failure. The investigation could lead to lawsuits against some of the principals, as happened during the savings and loan crisis of the late 1980s and early 1990s that required a massive government bailout.

Sen. Tim Johnson, D-S.D., chairman of the Senate Banking subcommittee that oversees the deposit insurance system, met Aug. 1 with OTS Director Ellen Seidman to discuss the Superior failure, according to the Associated Press. Seidman, who was appointed by former President Clinton, is leaving the post after Bush nominee James Gilleran is confirmed by the Senate.

Some experts are questioning the speed of regulators in trying to resolve the problems at Superior. As reported by The Associated Press, problems at the thrift were detected by the FDIC and the OTS as early as January 1999 and it then took nearly two years for the regulators and Superior to work out a plan for addressing its deficiencies, according to government officials and documents.

Superior's profits grew in the 1990s from making high-interest home and auto loans to consumers with troubled credit histories who cannot qualify for better rates, attracting customers nationwide with television ads and telemarketing.

The practice, known as nonprime or subprime lending, has become increasingly popular in recent years and is a focus of regulators' concerns. It played a role in the failure of two other institutions in recent years, First National Bank of Keystone, W.Va., and BestBank of Boulder, Colo., whose collapses contributed in 1999 to the biggest annual loss to the federal insurance fund since the regional bank crises of the early 1990s.

Superior Bank had announced in December 2000 that it is exiting the auto loan origination business. According to a company statement, it "had not achieved the necessary level of profitability."

Auto lending represented about five percent of Superior's total lending origination volume. Superior's main business focus was to originate, sell, and service nonprime mortage loans. Superior's 2000 fiscal year mortgage loan originations were $2.0 billion.