Regulators Seize Bank Founded by Mortgage-Backed Securities Pioneer

By Binyamin Appelbaum
Washington Post Staff Writer
Saturday, November 8, 2008

Federal regulators last night seized a Texas bank founded by Lewis Ranieri, a Wall Street legend who grew rich in the 1980s as the pioneering salesman of a new investment product called the mortgage-backed security.

Franklin Bank, based in Houston, described Ranieri in a securities filing last year as "the father of the securitized mortgage market."

Now the bank has become the latest victim of a crisis that began with the collapse of the market Ranieri helped to create.

The bank funded billions of dollars in home mortgage loans and also loaned billions to residential developers. As defaults rose, the bank concealed some of its losses, it disclosed this spring. By fall it was out of money.

Franklin, which held $5.1 billion in loans and other assets, is the third-largest bank to fail this year, behind Washington Mutual and IndyMac Bancorp. The bank's deposits and its 46 branches were sold to Prosperity Bank of Texas.

The failure is a personal setback for Ranieri, who served as the bank's chairman and then took over as chief executive in May.

Ranieri was immortalized by Michael Lewis in "Liar's Poker," which told the story of Ranieri's rise from the mailroom to the office of vice chairman at Salomon Brothers, largely by packaging mortgages into securities and finding investors willing to try something new.

During the housing boom, Ranieri was celebrated for that achievement. The appetite of investors for mortgage-backed securities made it possible for almost anyone to get a mortgage loan.

Even as it became clear that too much of a good thing was not a good thing, Ranieri remained influential.

Robert K. Steel, then the Treasury undersecretary for domestic finance, sought out Ranieri's advice last August, in the early days of the mortgage crisis. Ranieri told Steele that most mortgage-backed securities remained good investments, but investors had simply lost confidence.

Also yesterday, regulators seized Security Pacific, a small Los Angeles bank with four branches and about $560 million in assets. The two seizures raised to 19 the number of bank failures so far this year, compared with three for all of last year.

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