On this date eight years ago, we were sitting in our office all dressed up, prepared shortly to head up to the Senate Banking Committee to testify on the failure of Superior FSB, the biggest failure to that date since the S&L debacle.  The hearing was, of course, cancelled. It was then reconvened on the date the anthrax vials were found around the corner from the Banking hearing room.  Perhaps one lesson from this is to be afraid when you hear we’ve been asked to testify – another memorable instance was in 2005 when a House FinServ hearing at which we were testifying ran in panic into the streets as a small plane flew over the Capitol.  There is, though, a more useful reason we today recall our 2001 testimony:  much of what happened on a small scale at Superior was later repeated with cataclysmic results because Congress and regulators looked the other way.

Superior was a $2.3 billion thrift largely controlled by a wealthy family.  As such, it was insulated from shareholder discipline and became the first to run headlong into mortgage-securitization structures with which other savings associations were just beginning to toy.  Superior went big into residuals – risky tranches in securitizations – that it and its auditor failed to understand and applicable capital rules didn’t capture.  When the outside auditor finally started to raise concerns, these were dismissed within the accounting firm because the gig was just too good.  The OTS, needless to say, never noticed anything amiss.

At the Senate Banking hearing, we talked through all these problems, trying our hand at several reform suggestions.  None was ever taken up, though.  In fact, regulators went a very different direction.  At about the same time as the Superior hearing, the agencies finalized changes that tied risk-based capital for even the most complex asset-securitization positions to the ratings bestowed on them by S&P, Moody’s and the like.  Oops.

Regulators weren’t, though, the only policy-makers to look the other way after Superior’s then-historic collapse.  Congress did the same.  One hot topic at the session was the degree to which OTS competed with OCC for its “customers.”  Eight years later, the result of OTS’s search for what it called market-share has of course littered the landscape with failed institutions.  Senate Banking now wants to go even farther than the Administration to curb this competition.  Had it heeded its own warnings then, though, it might not need now to do so much not only to rewrite the regulatory agency line-up, but also to pick up the pieces from a cataclysmic brush with a financial systemic near-death experience.

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