The Pritzkers' Empire Trembles

Can a new generation halt the slide in the family's fortunes?

For Penny S. Pritzker, the 42-year-old firebrand who is carving out a leading role in her family's multibillion-dollar empire, this year should have been a time of triumph. Her nationwide network of upscale retirement communities, multifamily housing developments, and office park complexes has been growing like kudzu. She expects soon to break ground on a $350 million, 40-story office tower in the heart of Chicago to house her family's main businesses, the Pritzker Organization and Hyatt Corp. To top it all off, the fitness buff can still run circles around her male cousins, averaging about 8 1/2 minutes a mile in a recent half-marathon.

But this year may go down as one of the worst ever for the ambitious Penny Pritzker and her storied Chicago family. The collapse of Superior Bank, a $2.3 billion thrift that Pritzker chaired from 1989 to 1994, is putting the family's business savvy under the klieg lights in Washington and beyond. Profits are under pressure at its 203 Hyatt hotels--it owns 34--all across the world, just as the Pritzkers map out final plans for a controversial $1.2 billion development project along Boston's waterfront. And a major engine of the family's wealth, its $7 billion-a-year Marmon Group Inc. industrial and financial conglomerate, is sputtering in the manufacturing downturn as questions arise about who will succeed Marmon Chief Executive Robert A. Pritzker, one of the architects of the Pritzker fortune, who turned 75 this year.

The distress is a crucial test of the leadership skills of a triumvirate of Pritzkers who now oversee much of the family's vast holdings. Penny, her cousin Thomas, and Nicholas, their first cousin once removed, have been on their own since the death of family leader Jay A. Pritzker in 1999. For the first time, they are now being called on to protect the mostly private, $12 billion-a-year family business. How the Pritzkers handle their current woes will determine just how big a legacy they leave. Unlike other modern-day billionaires such as Warren E. Buffett and William H. Gates III, the Pritzkers intend to pass on the family fortune to the next generation. "The Pritzkers are golden," says Jonathan L. Kempner, chief operating officer of the Mortgage Bankers Assn. and an acquaintance of Penny's for a decade. "This is the first big stumble they've taken."

The Pritzkers' challenges are also an object lesson in just how difficult it can be to take control of a business dynasty. By letting New York real estate developer Alvin Dworman, a longtime friend and partner of Jay, have a free hand at Superior, they failed to grasp the problems there, which federal regulators describe as "poor lending practices, improper recordkeeping and accounting, and ineffective board and management supervision." Rather than pushing for a tighter focus in the manufacturing operations that their elder relative, Robert, has been running since 1953, they've tolerated weak returns from the almost arbitrary collection of businesses. And by continuing to concentrate on the fickle upscale hotel and convention business, they've all but missed out on the explosive growth of lower-end hotels.

The Pritzkers, one of America's wealthiest families, have eschewed the limelight ever since the patriarch--the first Nicholas Pritzker--came penniless to the U.S. from Russia in the late 1800s, earned a law degree, and launched the family's ventures. His sons Abram and Jack, also lawyers, expanded the family's interests with smart Chicago-area real estate deals. Abram's sons, Jay, Donald, and Robert, bought into Hyatt and other businesses. Today, the Pritzkers readily affix the family name to arts and educational institutions they sponsor, and bestow the most prestigious prize in architecture. But they remain vigilant about their privacy. None of the Pritzkers would comment for this story, and several of the companies they invest in also refused to comment.

But the Pritzkers won't be able to keep their business to themselves much longer. Officials at the Office of Thrift Supervision and the Federal Deposit Insurance Corp. (FDIC) are attempting to unravel the failure of Superior Bank, based in Hinsdale, Ill., which they took over from the Pritzkers and Dworman on July 27. The savings bank collapsed after the owners and regulators couldn't come to terms on a recapitalization plan made necessary by the deterioration in Superior's subprime loan base over the past two years. Indeed, the whole subprime segment is under stress as the economy weakens. The Pritzkers and Dworman, who each had a 50% stake in the thrift, had proposed pumping in as much as $355 million in new capital. But as recalculations of the bank's problem assets piled on more red ink, the Pritzkers pulled back. Their attorney, Harold S. Handelsman, who had been a director of the thrift's holding company, describes Superior as "a black hole of uncertain numbers and unknown losses."

"MISERABLE JOB." Just who erred and what went awry with the thrift remains murky. But with as much as $500 million in FDIC insurance funds at stake, the efforts to fix blame could get quite messy. Already, the dueling regulatory agencies have been faulting one another for lapses in oversight. And the Pritzker and Dworman camps have been conducting opposing stealth campaigns to tar each other or auditors Ernst & Young. Penny's friends say an "inevitable generational disconnect" with her Uncle Jay's colleague made it difficult to oversee his associates and led her to step back. For their part, people close to Dworman deride suggestions by the Pritzkers that they were "passive" investors. Dworman declined to comment. Meanwhile, everyone is bracing for lawsuits. "These are wealthy, sophisticated people," says Bert Ely, an independent banking consultant who has been tracking Superior's decline. "As businesspeople, they did a miserable job." In response, a source close to the Pritzkers says: "The Pritzker board members and those representing Mr. Dworman relied on unqualified opinions of its auditor. Superior Bank was highly rated by the regulators as recently as 1999. Hindsight is 20/20."

No one has suggested that the Pritzkers gained improperly at Superior, but their supervision almost certainly will be deemed inadequate. Dworman representatives have dominated the bank since he and Jay bought it in 1988; Dworman officials had far more intimate dealings there, including taking a $100 million loan from the bank's holding company. But Pritzker Organization officials unquestionably have been involved all along. Penny took the chairman's position in 1989, four years after earning her law and MBA degrees simultaneously at Stanford University. She quit in 1994, but as of July, she was still a director of the thrift's holding company, Coast-to-Coast Financial Corp. So, too, were Pritzker attorney Handelsman and Glenn Miller, a financial manager for the family who chaired the bank's audit committee.

TOUGH-MINDED. For Penny, a largely titular position and tolerance of lax management seem out of character. She oversees the extensive residential and commercial real estate interests of her family, outside of Hyatt and its other hotels, and runs a luxury retirement community unit, Classic Residence by Hyatt, that she started. She's responsible for operations in at least 11 states, ranging from several thousand apartment units and modest commercial developments to master-planned communities. By all accounts, she's tough-minded but modest and as demanding of herself as she is of others. "She's the quickest study and the clearest thinker I've ever met," says Robert J. Fitzpatrick, director of Chicago's Museum of Contemporary Art, whose board Penny chaired until recently.

She hasn't been afraid to wield her legal savvy on others' behalf. In 1997, when the Museum of Contemporary Art tried to collect a $5 million pledge that a former chairman balked on, Penny pushed the matter into court and then brokered a settlement. In the end, the museum accepted a contribution of two paintings instead, which today are valued together at about $7.5 million.

Penny Pritzker is also one of the most overtly political members of her family--a stance that could help her as the Superior case wends it way through Washington. She has contributed $189,000, mostly to Democrats, over the past few years, including $100,000 to the Democratic National Committee in 2000. She helped her younger brother, Jay Robert "J.B." Pritzker, run unsuccessfully in the 1997 Democratic congressional primary in Chicago. In all, the family has given some $666,500 to members of both parties since 1996.

Beyond Superior Bank, other parts of the Pritzker empire are showing their weak spots. It wasn't until last fall, for example, that Hyatt diversified into the fast-growing lower-end of the hotel business by acquiring the franchisor of Microtel Inns & Suites. The family finances are strong enough that they could start buying up distressed properties. But for now, Hyatt remains highly exposed to the falloff in business travel, since most of the hotels it manages or owns fit into the so-called upper upscale category. Hyatt Corp. doesn't release financial data, but a person close to the company says its profits are likely to slip from record-setting levels in 2000 to the still healthy range they reached in 1999. Profits in the segment industrywide are expected to slide 8.6% this year, according to PricewaterhouseCoopers. Thomas J. Pritzker minced no words in June at a New York investment conference, saying: "The summer will be fairly miserable."

Diminished returns at Hyatt aren't the only problem for Thomas, 51. He's also a board member of Royal Caribbean Cruises Ltd., where the family and partners hold a 25% stake. And the value of that--worth as much as $2.6 billion in January, 2000--has plunged to about $1.1 billion. The problem: Royal Caribbean and its rivals have been putting more ships into the water just as demand and pricing have started sinking. Net income for the cruise line is expected to drop to about $333 million this year, from $445 million last year, even as sales rise from $2.87 billion to $3.28 billion, according to Credit Suisse First Boston analyst Scott Barry.

Although these responsibilities keep Thomas Pritzker busy enough, he has made something of a side career out of his interest in Asia. He has chaired the Art Institute's committee on Asian art and photographed and written about 8th-century Nepalese art. In 1999, he played host in Chicago to Chinese Premier Zhu Rongji, presenting him with a 1,500-pound black Angus bull and a Chicago Bulls basketball jacket.

The faltering economy and the Pritzkers' predilection for staying in the background are complicating one of their most ambitious and contentious new development projects: the nine-building Fan Pier project in Boston. When Nicholas J. Pritzker, 55, who heads Hyatt Development Corp., first presented his plan, he was attacked in the Boston press as a carpetbagger with no concern for the city's precious harborfront. In recent months, he has repeatedly downsized the plan to meet the concerns of conservation and environmental activists. The mixed-use site was once expected to house two Hyatt hotels; now that's down to one. Nicholas also cut the height of planned towers, moved them back from the river, and increased open space. His flexibility has drawn praise even from a critic at the Conservation Law Foundation. But staff attorney Seth Kaplan still faults Nicholas and his cousins for taking far too low a personal profile: "If they could stand up and say, `We've played an important role in Chicago in creating good public spaces, and we want to help do that in Boston,' that would be a very welcome message."

FAN PLAN. Nicholas must have been particularly galled to be criticized as insensitive to the environment. The soft-spoken lawyer doesn't eat meat, is a fervent collector of dinosaur bones, and is so keenly interested in cosmology--the study of the origins of the universe--that he sponsored a symposium on the subject in 1999. "He's passionate, he's no dilettante," says Michael S. Turner, who chairs the Astronomy & Astrophysics Dept. at the University of Chicago.

Even though the family finally has a plan in place, Fan Pier will be built much more slowly than they had hoped. Instead of a target date of 2007, it may now take the Pritzkers until late in the decade to complete construction. First, key government approvals are still pending. And though capital contributions should not be a problem for the relatively underleveraged Pritzkers, raising funds from partners could take a while. Hyatt Equities LLC, the family-owned entity that has bought up Hyatt properties, was downgraded a notch, to a BBB debt rating last year, by Standard & Poor's Corp., which, like BusinessWeek, is owned by The McGraw-Hill Companies. The issue, says S&P analyst Craig A. Parmelee, is "continued development spending and our expectation for a slowing economy."

Perhaps the biggest financial questions for the family are about its largest, but lowest-profile, business operation, the Marmon Group. Robert A. Pritzker and his brother Jay put together the diverse collection of businesses that range from credit-reporting giant Trans Union to copper-tubing manufacturers. But Robert has no obvious successor from within the family and he is not talking about his retirement plans. "Bob has a succession plan, always subject to being updated, to continue that good management," a Marmon spokesman says. "He sees no benefit in publicly going into the details."

Succession is particularly important now at Marmon, however. The manufacturing recession that has idled assembly lines all across America in the past year has hit the company hard. Even as sales climbed 3.9%, to a record $6.8 billion last year, the outfit's earnings plunged 14.2%. The group has produced only lackluster earnings since the mid-1990s, posting mostly single-digit profit rises. The problem: Synergies seem elusive in a group of more than 150 companies with little in common. "We can hope this downturn will be short-lived," Robert told employees in a newsletter in April, "but we can't depend on it."

The Pritzkers can only hope that all their current troubles will be fleeting, a brief spasm rather than the beginning of a decline in their fortunes. The family is looking to Penny, Nicholas, and Thomas to put the problems--many of which they inherited--behind them. The challenge is to match the boldness of their fathers without repeating their missteps.

By Joseph Weber in Chicago, with Lorraine Woellert in Washington

— With assistance by Lorraine Woellert

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