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Wall Street Journal, May 21, 2008 article


The Wall Street Journal

May 21, 2008


New Setback for Ranieri

'Liars' Poker' Figure
Tries to Right Bank
After Lending Errors
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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