New Setback for Ranieri
'Liars' Poker' Figure
Tries to Right Bank
After Lending Errors
By ALEX ROTH and VALERIE BAUERLEIN
May 21, 2008; Page C2
Two decades ago, Lewis
Ranieri became a Wall Street legend by helping pioneer the practice of
packaging mortgages into securities -- a technique at the heart of the
subprime crisis. That and his penchant for polyester suits were later
immortalized in Michael Lewis's 1989 best-selling book "Liar's Poker."
Now a small Texas bank of
which Mr. Ranieri is board chairman, Franklin Bank Corp., is
under scrutiny for its handling of real-estate loans. Late Monday, the
Houston bank announced that an internal probe had uncovered numerous
accounting errors related to the bank's residential mortgages and
construction lending.
As a result of the audit,
the bank's chief executive, Anthony J. Nocella, "will accelerate his
personal plans to retire," the bank announced. Mr. Ranieri, 61 years
old, will take over as interim CEO.
The bank said in a
statement that it forwarded the audit findings to the Securities and
Exchange Commission, "which has commenced an informal inquiry." An SEC
spokesman declined to comment. A bank spokesman said the bank would have
no comment beyond its press release. Mr. Nocella couldn't be reached.
The announcement was the
latest blow for Franklin, whose market value has fallen to $25.6 million
from $424.1 million a year ago. Shares of Franklin were down three cents
to 98 cents in 4 p.m. Nasdaq Stock Market composite trading.
Mr. Ranieri, a onetime
star Salomon Brothers trader, became famous in the 1980s as an early
engineer of the mortgage securities that in the past decade attracted
billions of dollars of Wall Street investment. The collapse of the
subprime-mortgage market and subsequent devaluation of securities tied
to those mortgages has buffeted the banking industry over the past year.
Recently, Mr. Ranieri publicly expressed dismay at the "staggering"
transformation of the securities he pioneered into ever-more-volatile
investments.
The bank's announcement
was a setback for Mr. Ranieri, who had seen some successes in his Texas
banking ventures. A decade ago, he and Mr. Nocella were the top two
executives of Bank United Corp., the largest publicly traded bank in
Texas before it was purchased by Washington Mutual Inc. in 2001.
Like Bank United, Franklin
pursued a philosophy of focusing on construction and
residential-real-estate loans, establishing satellite offices in hot
markets such as California and Arizona, while maintaining a small
network of branches in Texas to collect deposits. The bank, which went
public in 2003, has been on a buying spree, acquiring eight other Texas
community banks in five years.
The bank's board requested
the audit after certain accounting "issues" were "brought to the board's
attention" in February, the bank said. The board hired the law firm
Baker Botts LLP to oversee the audit, which detailed a series of errors
ranging from failing to record certain write-downs to failing to charge
off certain uncollectible loans.
The audit "is going to be
an embarrassment to [Mr. Ranieri's] reputation," said Paul J. Miller, a
bank analyst with FBR Capital Markets in Arlington, Va. "There was
clearly some breakdown in the accounting controls."
At the end of the quarter,
about $1.3 billion, or 33%, of the bank's total $3.9 billion in loans
was in residential construction, according to Federal Deposit Insurance
Corp. reports. About $1.8 billion of total loans were single-family
residential mortgages.
Write to Valerie
Bauerlein at
valerie.bauerlein@wsj.com1
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