Ranieri becomes victim of mortgage crisis as Franklin is seized

Business Materials 9 November 2008 10:56 (UTC +04:00)

Lewis Ranieri, who helped create the mortgage-securities market in the 1980s while at Salmon Brothers Inc., became a victim of its collapse after his Houston-based bank was seized, TehranTimes reported.

Franklin Bank Corp., formed by Ranieri in 2002, was taken over by the Federal Deposit Insurance Corp., and its deposits handed over to Prosperity Bank, the FDIC said in an e-mailed statement yesterday. The failed bank's 46 offices will open as branches of Prosperity, the FDIC said.

Ranieri, 61, a former Salomon Brothers vice-chairman, formed Franklin in 2002 and over the next four years expanded the bank's lending operations. While Franklin avoided the subprime mortgage market, his firm was burned by loans to builders in California, Arizona, Florida and Michigan, where foreclosures are among the highest in the U.S. In November 2006 and again a year later, he predicted the market would get worse.

``The subprime crisis has spread to other sectors of the housing market,'' Ranieri said in a conference call a year ago. It's ``having a significant effect on housing and builders.''

Franklin and Security Pacific Bank of Los Angeles became the 18th and 19th U.S. banks seized this year amid the worst housing crisis since the Great Depression. Franklin's $3.7 billion in deposits were assumed by Prosperity, and Security Pacific's $450.1 million in deposits are now controlled by San Diego-based PacWest Bancorp.

All deposits from both banks are still insured, the FDIC said.

Regulators this year have closed the most banks since 1993, and the collapses of Washington Mutual Inc. and IndyMac Bancorp Inc. were among the biggest in history. The housing slump and tight credit led to a $700 billion bank-rescue plan, and the U.S. Treasury is using the fund to buy $250 billion in preferred shares in banks to boost capital.

In May, Ranieri replaced Anthony Nocella as chief executive officer after accounting errors related to real-estate loans. Alan Master was promoted to CEO in August, freeing Ranieri to try to raise money. That month, the company said it expected a $102.5 million second-quarter loss following $87 million in total losses the previous two periods.

In building Franklin, Ranieri enlisted Nocella among five former executives of Bank United Corp., later sold to WaMu, to run the bank. Ranieri took the bank public in 2003 at $14.50 a share, and the stock peaked at $21.88 in October 2006. Franklin shares tumbled 33 percent to 26 cents.

Franklin lost more than three-fourths of its market value during 2007 as bad home and commercial loans doubled. Ranieri said in December 2006 at an industry conference that investors in mortgage-backed bonds had no idea of the risks they were taking. Ranieri's assistant said he wasn't available for comment.

``The residential side was not their problem, it was clearly the commercial side,'' said David Lykken, co-founder of Mortgage Banking Solutions, an Austin, Texas-based consulting firm. ``The reason it took a little longer is because that trailed residential,'' he said in an interview.