Ranieri Becomes Victim of Crisis as Franklin Bank Corp. Seized

By Ari Levy

November 8 2008

Update 1

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

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.

Banks Closing

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 yesterday.

Franklin’s Decline

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. Worldwide credit losses and writedowns linked to the mortgage meltdown have swelled to $688 billion, according to data compiled by Bloomberg. Ranieri’s assistant said he wasn’t available for comment yesterday.

“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 yesterday in an interview.

Prosperity, of El Campo, Texas, will assume Franklin’s deposits, including brokered deposits, at a 1.7 percent premium. Prosperity will purchase $850 million of assets and the FDIC will retain the rest for later disposition, according to the statement. The FDIC estimates the transaction’s costs to its insurance fund will be $1.4 billion to $1.6 billion.

Pacific Western agreed to assume Security Pacific’s deposits at a 2 percent premium and buy $51.8 million of assets, with the FDIC keeping the rest. Security Pacific is the third California bank to close this year, after IndyMac and First Heritage Bank.

Cost of Failures

The FDIC oversees 8,451 institutions with $13.3 trillion in assets, and insures deposits of up to $250,000 per depositor per bank and the same amount for some retirement accounts. The agency has proposed doubling premiums charged to banks for coverage, to replenish its reserves amid agency forecasts that bank failures through 2013 will cost almost $40 billion.

The FDIC in August said 117 banks were classified as “problem” in the second quarter, a 30 percent jump from the first quarter. The agency, which doesn’t name “problem” lenders, will update its assessment this month.

“Banks overall are very well capitalized,” FDIC Chairman Sheila Bair told the Senate Banking Committee on Oct. 23. “We have some banks with some challenges, but the vast majority are well capitalized.”

The U.S. closed 27 banks from October 2000 through the end of last year, according to a list at fdic.gov.

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