In early July 2008, Businessweek ran an article on the inventor of the mortgage-backed securities. This article was well before the complete meltdown. Lewis S. Ranieri is known as the father of securitization. He crafted the first private pool of home loans sold on Wall Street in 1977.
What is so bizarre is I just happened to pick up this particular publication last week after the start of Paulson and Bernanke's testimony to Congress. Here is the kicker, after reading the article I wondered why wasn't Ranieri called to testify before the Banking Committee?
A Smart Idea Spoiled
As I watched the testimony, Dodd and Schumer repeatedly asked Paulson for details and alternatives to what Paulson had proposed. Paulson didn't seem to offer any clear explanation or details to the questions that were raised by the Senators.
Ranieri predicted the outcome in early 2005 when he warned that the mortgage market's excesses would "blow up in our faces."
Ranieri, 61, is an éminence grise to Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry M. Paulson. He has a field-level view of the credit market wreckage as chair of troubled Franklin Bancorp and co-founder of a fund launched in May that buys distressed mortgage loans.
(éminence grise is a powerful advisor or decision-maker who operates secretly or unofficially)
According to Ranieri said that the problem became out of control with create the exotic mortgages and the massive growth of subprime mortgages between 2004 - 2005. He says something we all know is true, that greed over road fear on Wall Street.
What is particularly interesting in this article is that Ranieri outlines how to fix the problem.
We have never before had to restructure a large number of loans tied up in securitizations. We need to fix the issue so the servicer is empowered and paid to act like a fiduciary, with the responsibility to make changes to the terms of loans—especially new loan types like interest-only and payment-option adjustable-rate mortgages. I have always contended that such exotic loans are inherently more dangerous.
If you don't fix the second mortgages, including home equity loans and piggyback loans, they will add to the downward spiral of the housing market. The first mortgage holder can't restructure a loan because the lender with the second mortgage—although underwater—doesn't want to take a loss. So that lender blocks the loan workouts and the house goes into foreclosure.
In the end, it may very well need legislation. We're going to have to bring to bear the resources we have like Freddie Mac (FRE), Fannie Mae (FNM), and the Federal Housing Administration. We need their help to reimpose standardization of products and pricing models that work—maybe even some legislation dealing with the second-mortgage issue.
Now here is something to think about. The Federal Government now owns Fannie Mae, Freddie Mac, and AIG. Based upon Businessweek interview, Ranieri owns a business that buys up distressed mortgage loans. Isn't that what Paulson was asking for the authority to do? To buy up all the bad debt? If Ranieri says the solution to the problem is to restructure loans isn't that something that could happen in bankruptcy court by a judge?
Maybe it is just my conspiracy theory mind running in circles, but something just doesn't quite pass the smell test.
None of this has been subject to a critical analysis. We haven’t had access to the books to the people who are claiming they are going broke. --Dennis Kucinich