Lewis Ranieri’s Franklin Bank Seized By Federal Regulators
Yet another U.S. bank bites the dust. This time it’s Houston-based Franklin Bank, founded by Lewis Ranieri, the man who pioneered mortgage-backed securities.
Federal regulators seized Franklin Bank late Friday evening, Nov. 7 - its downfall attributed to the market its creator helped launch. As reported Nov. 8 in the Washington Post, Franklin Bank funded billions of dollars in home mortgage loans, as well as made billions of dollars worth of loans to residential developers in California, Arizona, Florida and Michigan - all areas where foreclosures are among the highest in the nation. When defaults began to skyrocket, Franklin Bank reportedly tried to conceal its losses. By October, reality struck: The bank simply was running out of money.
As of Sept. 30, 2008, Franklin Bank had assets of $5.1 billion and deposits of $3.7 billion, the latter of which will be assumed by Prosperity Bank of El Campo, Texas. Prosperity will purchase $850 million of Franklin’s assets, with the Federal Deposit Insurance Corporation (FDIC) to retain the rest. The FDIC estimates that the cost to its Deposit Insurance Fund for the transaction could be up to $1.8 billion. The failure of Franklin Bank - the 18th bank failure so far this year - marks the first bank to fail in Texas since the Bank of Sierra Blanca, which went under on Jan. 18, 2002.
The demise of Franklin Bank is a dramatic setback for Ranieri, whose professional story is the stuff of Wall Street legend. He started his career at Salomon Brothers in 1968, working for $70 a week as a night-shift mailroom clerk. Over the next two decades, he secured stints on Salomon’s trading desk and eventually became vice chairman and head of the firm’s mortgage finance division. Then, in 1987, Ranieri was abruptly fired.
Ranieri, now 61, went on to forge a second career for himself, which included launching Hyperion Capital Management, a fund that invests primarily in mortgage-backed securities. In 2002, Ranieri formed Franklin Bank in Houston, Texas. In May 2008, he was named as its interim chief executive officer. He resigned from that post in August 2008, but remained on as chairman of the bank’s parent company, Franklin Bank Corp.
In June 2008, the Securities and Exchange Commission began an investigation of Franklin Bank, following a lengthy internal probe that had uncovered numerous accounting errors related to residential mortgage loans, as well as improper lending practices.
Shares of Franklin Bank have lost more than 90% of their value this year, after peaking at a high of $21.88 in October 2006 to 26 cents on Nov. 3, 2008.
Now it seems Ranieri truly has come full circle, with the bank founded by the so-called father of the securitized mortgage market itself a victim of the product Ranieri helped create.
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