Lewis Ranieri, who pioneered mortgage backed securities when he worked at Salomon Brothers in the late 1970s and more recently warned against their misuse, is the latest victim of the nation’s housing crisis.
The FDIC seized his Houston-based Franklin Bank last week. The move will eventually cost the agency’s insurance fund between $1.4 billion and $1.6 billion, the FDIC estimated.
In 2004, Business Week hailed Ranieri as one of the greatest innovators of the past 75 years because of his work at Salomon. Among others on the magazine’s long list: Bill Gates, Steve Jobs, Tom Watson Jr., Ray Kroc and Chester Carlson, the inventor of xerography.
The magazine wrote: “A large, volatile man, Ranieri built the firm’s mortgage desk in his own image: ‘fat guys,’ as author Michael Lewis described them in Liar’s Poker, promoted from the back office, who indulged in feeding frenzies and practical jokes while selling strange new bonds to doubtful investors.”
Recently, however, as home values have plummeted around the country, mortgage backed securities and other derivatives have compounded the financial problems.
Chain of Blame, a new book that focuses on Wall Street’s role in the housing crisis, says that Ranieri sounded a warning in late 2006 against rampant mortgage securitization at a conference in Washington, D.C.
Subprime and other risky loans were vastly different from the prime loans that the industry focused on when he helped invent mortgage backed securities, he said. There wasn’t sufficient history with these new loans to judge how they would perform over the long term.
He was right, but in the end, bad real estate loans, especially in California, contributed to the failure of Franklin. The bank, founded in 2002 by Ranieri, had $5.1 billion in assets when it was seized. Ranieri was still chairman.
On Friday, the FDIC also seized Security Pacific of Los Angeles, bringing the total number of bank failures so far this year to 19. Prosperity Bank takes over Franklin’s operations.
“We turn over the clean assets to Prosperity so all the headaches that brought down Franklin stay behind with the FDIC,” and FDIC spokesman said.
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