Tucked quietly into the weekend news was the hugely symbolic seizure by the Federal Deposit Insurance Corporation of Franklin Bank Corp., a Houston-based bank with a mere $3.7 billion in deposits. The fact that Franklin Bank was the 17th bank the government seized this year amid one of the worst credit crises to hit the country since the Great Depression was not what made its demise newsworthy.
Rather what made Franklin Bank so special was its pedigree: Franklin was the brainchild of Lewis Ranieri, 61, who many people credit with being the godfather of the mortgage-backed security, when he was at Salomon Brothers in the 1980s. While Franklin Bank managed to avoid making subprime mortgages, it was an aggressive lender to homebuilders in the now heavily-depressed—and once booming—markets of California, Arizona, Michigan and Florida. Ranieri formed Franklin Bank in 2002, took it public at $14.50 per share in 2003 and watched the stock reached its peak of $21.88 in October 2006. Ranieri, who was the bank’s chairman, was Franklin’s single-largest individual shareholder with close to one million shares and a 4% stake. Although the stock closed Friday at 26 cents, down 33 percent, Ranieri remains a wealthy man, thanks to his control of various private equity funds and corporate chairmanships.
Ranieri knew better and still did nothing to stop the disaster at his bank in Texas.
The irony, though, is that Ranieri knew better and still did nothing to stop the disaster at his bank. At Salomon, he was the man who coined the word “securitization” to describe buying bundles of home mortgages and slicing and dicing them into different tranches and selling them off to investors around the world. He realized mortgages were nothing more than “math” and hired a team of Phds to do the structuring. In February 2007, as the value of homes nationwide started to tumble along with the value of the mortgages tied to them, The Wall Street Journal interviewed the “rumpled’ Ranieri. The Journal reported he was “worried about the proliferation of risky mortgages and convoluted ways of financing them. Too many investors don’t understand the dangers… The problem, he says, is that in the past few years the business has changed so much that if the U.S. housing market takes another lurch downward, no one will know where all the bodies are buried.” Added the man himself: ‘I don’t know how to understand the ripple effects throughout the system today,”
Two months later, on April 25, Ranieri popped up again at the Milken Institute, in Los Angeles—the brainchild of former convicted felon and junk-bond king Mike Milken—with more dire warnings about the mortgage market. “The last four years have been extraordinary,” he said that day. “…It's been a halcyon period in terms of taking financial innovation and using it to put housing much more deeply into the population. We've been able to franchise many, many more lower [and] middle income and minority individuals into home ownership, over the last four years, than probably, in the 10 or 15 years prior to that. Unfortunately, we're now facing a trial, which in many ways will determine how well we can continue to innovate into the future.”
He remained concerned about subprime mortgages and the collapse of existing home sales. “You saw the papers today, existing home sales were down 8.4 percent,” he continued. “This will be the eighth month in a row, where the median house price declined. We are very likely to see an overall decline in the median house price for the year, for the first time in recorded history.” He said the “subprime mess” was both good and bad because “on one hand, [it] enabled many, many people to get into housing who might not otherwise have. And, on the other hand, unfortunately, put many, many people into houses they couldn't afford.”
On October 1 of this year, Ranieri delivered a lecture at Harvard on the “Revolution in Mortgage Finance.” He is a very bright man and that came through loud and clear in his 45-minute nearly extemporaneous talk. “When we created this industry,” he said, referring to the mortgage securitization business, “a house was shelter and a lifestyle decision, not a new form of ATM.” Unfortunately, he said, the “insanity” phase of the industry, which we are now in, “created a big hot-air balloon, where an individual loan was leveraged 100 times. Then we stuck a pin in the balloon” and as a result “the private market is now completely closed down and the confidence it took 35 years to build is gone.”
What he did not get around to mentioning in any of these articulate speeches was the role Franklin Bank played in financing the home builders who built the homes that were bought by people with mortgages they couldn’t afford. Ranieri’s not doing much talking to pesky journalists these days. But it sure was a fun party while it lasted wasn’t it, Lew?