Regulation

Franklin, Security Pacific Banks Are Taken Over

Texas regulators close Franklin, controlled by financier Ranieri, while California moves on Security Pacific. FDIC is named receiver for both.
Stephen TaubNovember 10, 2008

Regulators closed two banks — including Houston-based Franklin, controlled by one of the inventors of mortgage-backed securities — in part due to losses on real estate investments.

Franklin Bank SSB, closed Friday by the Texas Department of Savings and Mortgage Lending, has as its chairman Lewis Ranieri, who earlier in his career was vice chairman of Salomon Brothers Inc., and was responsible for its activities in the mortgage, real estate, and government-guaranteed areas.

The Federal Deposit Insurance Corp. was named as receiver for Franklin, which will have its 46 offices reopened as branches of privately-held Prosperity Bank.

Also on Friday, Los Angeles-based Security Pacific Bank was closed by the California Department of Financial Institutions, again with the FDIC becoming receiver. Four branches of Security Pacific reopened on Monday as branches of Pacific Western.

In his official bio, Ranieri takes credit as being the “father” of the securitized mortgage market. It says that he “helped develop the capital markets as a source of funds for housing and commercial real estate, established Salomon’s leadership position in the mortgage-backed securities area, and also led the effort to obtain federal legislation to support and build the market.” He and then-Salomon CEO John Gutfreund were prominently featured in Michael Lewis’s 1989 book Liar’s Poker, one of the books that described greed and vulgarity in Wall Street in the 1980s.

Ranieri has served as Franklin’s chairman and has been a director since the bank was founded in 2001. In May, he assumed the additional role of interim CEO after Franklin said that an internal review determined that Franklin had engaged in improper accounting in a number of mortgage-lending areas. Ranieri is also the former chairman and lead independent director of software giant CA Inc., and is the founder of hedge funds Hyperion Partners L.P. and Hyperion Partners II L.P. He left the chairmanship of CA in June 2007 and retired as a CA director last December.