Securitization is like fertilizer. You can grow tomatoes or blow up buildings.
—HEDGE FUND MANAGER SIMON MIKHAILOVICH
© Fred Prouser/Reuters/Corbis
The world’s bond markets underwent a revolution during the last decades of the twentieth century. Michael Milken’s junk bonds forever changed the scope of corporate bonds, expanding their use from a small number of blue-chip corporations to a much larger group of medium-sized and less creditworthy enterprises. And Milken had a corevolutionary in shaking up the bond world: Lewis Ranieri. While Milken’s Drexel Burnham Lambert was making a name for itself by originating junk bonds and engineering leveraged buyouts, Ranieri, stationed at the trading desks of Salomon Brothers, was developing a new financial process called “securitization,” which he applied first to mortgages. Securitization didn’t create much of a stir when it was first introduced, but over the final decades of the twentieth century its use expanded enormously, and a new asset class called mortgage-backed securities became a mainstay of housing finance. Dwarfing Milken’s junk bonds both in number and importance to the economy, these mortgage-backed bonds grew increasingly exotic and unwieldy until, in 2008, they became the proximate cause of the financial crisis. Ranieri left Salomon Brothers and the securitization business twenty years before the crisis arose, but he still refers to himself as “Dr. Frankenstein” for his role in creating the MBS monster—albeit a monster far different and much more virulent than his early creation.1
The Corevolutionaries Compared
Milken’s and Ranieri’s careers on Wall Street were remarkably coincident. Milken started at Drexel Harriman Ripley in 1969 in the firm’s back office; Ranieri began working the night shift in the Salomon Brothers’ mailroom in the same year. And by the end of their foreshortened careers, each was accounting for the largest portion of the profits of their respective firms.
Otherwise, however, Milken and Ranieri had little in common. Milken was taut and slender, with a no-nonsense, scholarly mien; except when the subject turned to business, he had little to say and his social life seldom veered from small family affairs. Ranieri, on the other hand, had a Rabelaisian personality and was loud and generally uncouth. He was infamous at Salomon as the perpetrator and subject of outrageously elaborate and sometimes profane practical jokes among his fellow bond traders2—while Milken, when the Drexel traders hired a stripper to dance on his desk for his thirty-eighth birthday, simply retreated under the desk with his phone and continued trading.3
Likewise, their paths to Wall Street were completely different. Milken arrived at Drexel as a financial prodigy from an Ivy League school with a well-charted path to great wealth, whereas the Brooklyn-born Ranieri took a night shift job in Salomon’s mailroom only as a means to help pay his tuition at St. John’s University. His family had been financially unstable since his father’s death when Lewis was just thirteen, and they managed to get by only by moving into an apartment above his grandfather’s bakery. He planned to be an Italian chef, working in his uncle’s restaurant in the evenings and weekends while in high school, until asthma set in and he could no longer tolerate the fumes of the kitchen. So instead he enrolled in college, working in the Salomon mailroom to help pay the bills. But when he was offered a promotion to mailroom supervisor, Salomon became a career and he dropped out of his sophomore year of college to follow it. (Seventeen years later, in 1986, he completed his work and received a BA in English from St. John’s, and in 1987 the university awarded him an honorary doctoral degree).
Exiled to the Mortgage Department
Salomon was a fortuitous choice. Of all the major New York investment houses, Salomon most closely resembled a meritocracy; social connections and savoir faire counted for little (good in Ranieri’s case, since he had little of either), and ability and drive for everything. Founded in 1910 by Arthur, Herbert, and Percy Salomon as a specialty bond trading company, the firm quickly grew into a major government bond operation, spurred in its growth as a primary dealer in the Liberty Bonds that were sold to finance the United States’ participation in World War I. In 1969, when Ranieri came on board, the firm was still conducting a business largely confined to trading and underwriting government, municipal, and corporate bonds. It had not veered significantly into equities and sought no presence whatsoever in the retail side of the business.
In his first five years at the firm, Ranieri moved through a series of ever-increasing responsibilities in Salomon’s back office. He was a brash and tough-minded boss, using screaming and intimidation to keep his staff of clerical workers in line. His salary increased commensurately, but he knew that the key to success at Salomon was landing a job on one of its trading desks. In 1974 that opportunity arose with a position trading the bonds of public utility companies. Ever the quick study, Ranieri, working the phone for ten to twelve hours a day, began making more money than any Italian chef could have thought possible.
But another five years later, Ranieri was snatched from the public utilities desk out of the blue and ordered to join Salomon’s newly created mortgage department as its chief trader. Ranieri saw the move as a signal of unhappiness with his performance; after trading public utility bonds in multi-million-dollar transactions, the prospect of buying and selling, say, a $50,000 loan on a house in Cedar Rapids, Iowa, seemed like a waste of a high-powered trader’s time and talent. There was no other Wall Street firm that had figured out how to make money in the mortgage business and to Ranieri it looked like an exile to a Wall Street Siberia.
Yet Ranieri’s allegiance to Salomon was strong—in a ten-year span the firm had transformed him from an impoverished nineteen-year-old kid to a bond trading mogul—so he willingly went to work assembling a group of mortgage traders. The crew was laughably Ranieri-like: largely from Salomon’s back office, Italian, overweight, loud, and un-degreed. After the base trading group was in place, he added the other elements to the operation, including mortgage salespeople and mortgage research analysts—all newly created positions. Ranieri was making it up as he went, but by the end of 1979 he had constructed Wall Street’s first full-fledged mortgage operation.
For the first year or so, business trickled in, but hardly in the volume needed to support Ranieri’s department—much less to make a profit. Then, as through an act of providence, a series of events unfolded that ended with Ranieri’s being the new star of Salomon Brothers and his department the most profitable in the firm.
The trigger was the appointment of the strong-willed Paul Volcker as the new chairman of the Federal Reserve. The country was suffering from double-digit inflation, and Volcker immediately launched a program to tighten the country’s money supply. His monetary austerity program was meant to choke off some of the forces of demand in the economy, but it also had the effect of driving up short-term interest rates to unprecedented levels, as high as 20 percent.
There was no sector of the economy harder hit by Volcker’s tight-money policy than the savings and loan industry. At the time, S&Ls—also called “thrifts”—were the main source of mortgage finance, bringing in money from their depositors and lending it back out through mortgage loans. The manager of a savings institution usually worked with a simple and profitable business model that carried the tag “3–6–2”—pay depositors 3 percent, lend their money at 6 percent, and be on the golf course at 2 o’clock. But under Volcker’s tight-money policy, the model collapsed. With the prospect of paying depositors close to 20 percent to attract new money, the S&Ls instead closed the window on new mortgage lending. Volcker had cooled down the economy, at least with respect to the demand for housing, but his actions also threatened the very existence of the sleepy thrift industry. A slowdown in new mortgage origination wasn’t in itself a boon for Ranieri, since it reduced the raw material of new mortgages available for trading. But the reaction of Congress was.
Legislators had long supported the thrifts, which were the mainstays in providing the financing necessary for the politically popular cause of homeownership. So in 1981, a group of friendly members of Congress devised an outlandish tax break to save the S&Ls. Beginning in October of that year, those institutions were allowed to sell their mortgages and spread any loss resulting from a sale over the remaining life of the loan. Consider the example of a mortgage on a thrift’s books that had twenty years left until it was fully paid off, but which could only be sold at a 40 percent discount, that is, sold at sixty cents on the dollar. (The value of a financial asset, including a mortgage, varies inversely with the level of interest rates; when rates rise, as they did dramatically under Volcker’s direction, mortgages sell at steep discounts.) Under the custom-made tax provision for thrifts, the institution could immediately sell its mortgages at a discount but recognize the loss at a rate of just 2 percent per year for the remaining twenty years. What’s more, the losses that were reported could be used to offset prior taxable income, meaning that the thrifts received refunds of taxes they had earlier paid. All this government largesse was in the name of homeownership, since the immediate proceeds from the mortgage sales and tax refunds would presumably be funneled back into new loan originations by the thrifts.
With that munificent act of Congress, S&Ls began selling their mortgages in torrents—and Salomon’s new and fully staffed mortgage department was the only game in town for buying them. A trader, however, has to have order flow on both the buy and the sell side of the transaction, so Ranieri’s sales force simply bought the “whole loans” at a major discount from one S&L and sold them, at a somewhat lower discount, to another S&L. It was something of a shell game—Larry Fink, who would eventually run a competing mortgage operation for the First Boston Corporation, proclaimed, “October 1981 was the most irresponsible period in the history of the capital markets”4—but Salomon was now the monopolist in the secondary market for home mortgages. It was a financial bonanza for both Ranieri and Salomon Brothers.
“So Cheap Your Teeth Hurt”
A one-time bonanza, however, was a shaky foundation on which to base a long-term mortgage business. While selling whole loans back and forth between desperate S&L executives—often at unconscionable markups—resulted in extraordinary profits, that market would eventually play out. Small and often shaky thrift institutions were far from the ideal customers for Salomon, and Ranieri realized that he would have to provide a product for the firm’s traditional institutional customers that was something other than a whole loan—something more like a bond.
The product that fit the bill was called a mortgage-backed security, or MBS. While varieties of the MBS had been created as early as the 1800s in the U.S., their use in the twentieth century had been dormant until members of the Salomon Brothers’ government bond department revived a form of security formerly known as a mortgage-backed debenture.5 They conceived of a bond tailor-made for the Bank of America—the first institution willing to work with Salomon by selling the firm a portion of its residential loan portfolio for packaging and resale on Wall Street. It was a noble effort, but poorly designed and eligible for sale in only three states. In Ranieri’s later assessment, the pioneering Bank of America mortgage bond was “a total bomb.”
After Ranieri took over the management of Salomon’s newly formed mortgage department—coinciding with the explosion of interest in trading mortgages on Wall Street—he once again revisited the MBS idea. Taking a second run at creating a viable MBS, he cured the key infirmities of the Bank of America bond. To create diversity beyond a single financial institution, his department gathered a large collection of individual mortgages (whole loans) from several banks and thrifts and then pooled them into a bond-like security. Using a process he called securitization (credit for coming up with that name for the process is generally given to Ranieri) payments of principal and interest on the hundreds of loans making up the MBS were passed through to the investors. With Ranieri’s brand of securitization, institutional investors could realize an investment of suitable size and loan diversity for their portfolios.
But Ranieri recognized that one further feature of the MBS was still necessary for the bonds to gain acceptance among investors and traders: Washington’s blessing. The government had long played a major oversight role in the U.S. mortgage business but had not officially endorsed the MBS structure. So with a team of legal experts and lobbyists, Ranieri descended on Washington, and by 1981 the Federal National Mortgage Association (“Fannie Mae”) had put its imprimatur on the MBS. That meant that Salomon’s mortgage-backed bonds, as long as they were composed of mortgages conforming to Fannie Mae requirements, had the agency’s stamp of approval. Since this approval was not the same as the full faith and credit of the U.S. Treasury, the MBS became a “moral obligation” of the federal government.
Now that his MBS product bore the Fannie Mae “stamp”—and almost always an accompanying AAA rating from Standard & Poor’s and Moody’s—Ranieri went on the road to make a hard pitch to Salomon’s institutional clients. Much as Drexel Burnham Lambert “owned” the junk bond market in the early 1980s, Salomon, as the first mover in mortgage products, claimed ownership of the MBS product. In Liar’s Poker, an insider’s account of Salomon Brothers during the 1980s, Michael Lewis recalls how the two bond revolutionaries promoted their respective products:
Ranieri, along with the guru of junk bonds, Mike Milken of Drexel Burnham, became one of the great bond missionaries of the 1980s. Crisscrossing the country, trying to persuade institutional investors to buy mortgage securities, Ranieri bumped into Milken. They visited the same accounts on the same day. “My product took off first,” says Ranieri. “Investors started to buy the gospel according to Ranieri.”6
Milken had to persuade potential junk bond buyers that the low bond ratings his product carried were either not indicative of the real risk or, alternatively, that the return was so high it more than justified that risk. For Ranieri, by contrast, credit risk was not an issue. His MBS product carried the highest rating possible because of the implied guarantee from a U.S. government agency. Yet, compared to AAA-rated corporate bonds, the yields were much higher. “Mortgages were so cheap your teeth hurt,” Ranieri liked to say.7 His sales pitch worked, and the MBS became a respectable form of security attractive to a growing number of institutional investors. With the success of the mortgage-backed market, 1982 was a breakout year for Ranieri; his mortgage department made about $175 million, and he took home over $2 million of that profit.8
However, the MBS was still not appealing to all bond buyers. In particular, no one running a pension fund or life insurance company would touch it. The mortgage bonds might carry little or no credit risk and sport premium interest rates, but there is no free lunch on Wall Street, and the high interest rates on the MBS bonds reflected another major risk: the risk of prepayment. Institutional investors with long-term investment horizons needed matching long-term bonds, but an MBS (even one built out of thirty-year mortgages) could pay off much sooner than expected if interest rates dropped and a high percentage of individual borrowers decided to refinance their mortgage loans.
This structural problem with the MBS was due to the extremely attractive feature attached to a residential mortgage—namely, the right of the borrower to pay it off at any time without penalty. If interest rates fell, homeowners could always refinance their mortgages at a lower rate and thereby reduce their monthly payments. Virtually no other long-term borrower had this cost-free option. Corporate borrowers in the bond market, for instance, have to pay some combination of a premium interest rate and a prepayment penalty for that right. But homeowners, as a protected political species, enjoyed a congressionally mandated option to prepay without cost or penalty.
That option made the MBS unpalatable to the typical long-term investor. An institutional fund manager holding a conventional corporate or government bond could be certain that the price of that bond would increase as interest rates fell—and decrease as they rose. But, maddeningly for the long-term investor holding mortgage-backed bonds, just as interest rates began to fall, the home loan borrowers behind the MBS began to prepay their mortgages. When the bonds were taken away through prepayment, the bonds’ investors were deprived of an appreciation in price. Conversely, when interest rates rose, nobody wanted to refinance a mortgage through prepayment, and the institutional investor was stuck for the duration with low-yielding mortgage bonds. It was obviously an unattractive prospect for bond investors to have limited control over the maturity of the bond—and so they avoided the MBS, or required interest rates that were at a very high premium over their triple A–rated corporate or government cousins.
Mortgages Are Math
With trillions of dollars of potential institutional funds remaining on the sidelines, it didn’t take long for Ranieri and his group to design a security that addressed the prepayment problem of the MBS. In 1983, Salomon (in tandem with the First Boston Corporation) came up with a new kind of bond called a collateralized mortgage obligation, and within a short period of time CMOs became a fixture among institutionally traded securities. It also brought to Wall Street a new kind of employee—the “quant”—since, in terms of mathematical complexity, an MBS is to a CMO as checkers is to chess. Ranieri began to proclaim that “mortgages are math,” and his new hires in the mortgage department, whether on the trading desks or otherwise, no longer arrived from Salomon’s back office but from graduate business programs and math departments of universities.
While a CMO was, like an ordinary MBS, made up of standard home mortgages, the CMO was chopped up into several “tranches.” In the earliest and easiest to understand CMOs, the three or more tranches (“slices” in French) were based on the order of mortgage repayment. Because of the flexible prepayment feature for borrowers, the average life of a standard thirty-year mortgage is only about seven years. In the normal course of events, people move, people die, people come into money and pay off their mortgage early, and, as the pivotal wild card in the equation, people refinance their mortgages when rates fall. So while some thirty-year mortgages pay off in thirty years, many more pay off much sooner. The CMO tranches divided those mortgages that paid off quickly from those that didn’t, and each tranche was matched to the maturity needs of the investor. The owners of the first tranche were made up of investors with a relatively short investment horizon (such as banks or casualty insurance companies), and they were happy to be the first to have their bonds retired as mortgage holders elected to prepay. After the first tranche investors were paid back, all prepayments went to the second tranche investors; then to the third and any successive tranches. So a long-term institutional investor could choose a later tranche and know, based on history and statistical analysis, what the investment’s duration was likely to be.
With Salomon able to offer a mortgage product that was engineered to match a financial institution’s liabilities, the floodgates opened for new money to feed the housing sector. Long-term institutional investors (like pension funds, life insurance companies, and endowments) began funneling tens of billions of new dollars into mortgages through CMOs. That led, of course, to the entrance of more investment firms into the MBS business and the end of Salomon’s monopoly. But during the flush years of the early eighties, the firm still did exceedingly well. As Michael Lewis recounted in Liar’s Poker: “Although there are no official numbers, it was widely accepted at Salomon that Ranieri’s traders made $200 million in 1983, $175 million in 1984, and $275 million in 1985.”9 Ranieri’s upstart mortgage operation, in business for only five years, was now accounting for 40 percent of the seventy-five-year-old Salomon Brothers’ revenues.10
Within the revenue-driven culture of investment banking, the ability to produce new business is often confused with managerial talent. Following that pattern, in 1986 Ranieri was appointed vice chairman of Salomon Brothers and a member of its four-person office of the chairman. In Salomon’s hallways there was talk that Ranieri would be the next chairman when John Gutfreund stepped down; Gutfreund himself even dropped hints to that effect. Ranieri was no longer active at the trading desks of the mortgage department; he and the other three top executives spent their days running the six thousand–employee firm and charting its directions.
Yet the only thing the four seemed to have in common was a deep-seated dislike for one another. In theory, the managing foursome was meant to take an objective and big picture perspective. In practice, their interests remained parochial and protective of the departments they once led. And while the other three—Tom Strauss, Bill Voute, and Gutfreund—were politic in their actions, Ranieri had grown much wealthier but not noticeably more polished during his time with the firm and was most often a querulous voice in their meetings. With the mortgage operations of Salomon accounting for the most substantial portion of the company’s profits, he was indefatigable in arguing that “his” employees deserved a greater level of compensation. In the summer of 1987, chairman Gutfreund solved the Ranieri problem by summoning him to his office and firing him on the spot. But the MBS machine that Ranieri had started did not stop with his departure.
Race to the Bottom
During the several decades prior to the 1990s, as the MBS market was just taking hold, the percentage of U.S. households living in their own homes hovered around 65 percent. But starting in 1994, there was a straight line of upward growth to a level of nearly 70 percent by 2004. Rising levels of home ownership have always been politically important, and the efforts to increase those levels—including the increased supply of mortgage funding from MBS-buying institutional investors—found favor in Washington. In the cause of providing affordable housing, the two government agencies that provided much of the raw material for MBS creation, Fannie Mae and its look-alike brother, the Federal Home Loan Mortgage Corporation (“Freddie Mac”), were given much room to maneuver in their operations, and both agencies were supportive of the MBS markets.
Between 2005 and 2006, both interest rates and home prices rose substantially—double trouble for the cause of affordable housing. In 2005 and 2006 many prospective home buyers had to take out larger loans, and those loans carried higher monthly payments. Other prospects were simply priced out of the market. The reactions of mortgage bankers and investment bankers to this reduced pool of qualified buyers sowed the seeds of financial disaster.
To keep the demand for homes from falling—and the MBS and CMO pipelines full—originators and underwriters of mortgage loans, under the approving eye of Fannie Mae and Freddie Mac, drastically reduced credit standards and began an aggressive campaign to generate “subprime mortgages.” These were loans to borrowers whose credit standing would have made them ineligible to take out a mortgage under conventional guidelines. Subprime loans were often promoted to unsophisticated loan applicants by unscrupulous mortgage bankers and came with little required loan documentation (“low-doc” loans) and sometimes no documentation at all (“no-doc” loans). A growing number of loans were granted to NINJA borrowers—those with “no income, no job, or assets.”
In the spirit of avoiding a housing downturn, Fannie Mae and Freddie Mac joined the race to the bottom by lowering their underwriting standards. In 2003, they had approved $395 billion in subprime loans (including a close variation called Alt-A loans); just a year later that amount climbed to $715 billion, and in 2006 it was over $1 trillion.11 Other mortgage originators were rapidly expanding into the subprime market, creating so-called private label mortgage-backed securities, but the two government agencies bear special responsibility for the financial hardships that followed, because they were charged not only with preserving soundness in the mortgage markets but with protecting borrowers. One risk manager wrote in an email to her boss, Freddie Mac chief executive Dick Styron, protesting the agency’s lapse in standards and saying, “What better way to highlight our sense of mission than to walk away from profitable business because it hurts the borrowers we are trying to serve?”12 But to no avail.
Other culprits also played major roles. The banks and mortgage bankers that originated the subprime loans often shirked their fiduciary and moral responsibilities by “underwriting” mortgage loans that had little prospect of being paid back—short of an irresponsible assumption that borrowers would be bailed out of their loans by continued appreciation in home values. The investment firms and other financial institutions that securitized mortgages are also blameworthy. The garden varieties of MBS and CMO that they packaged in the early years of securitization were almost all conventionally underwritten mortgages rather than subprime loans, and those bonds continued to perform reasonably well. But when those institutions added the more exotic CDOs—collateralized debt obligations, which were the main repository for subprime loans—they and their “toxic asset” CDOs became lead perpetrators of the disaster to come. The credit-rating agencies—the familiar names of Standard & Poor’s, Moody’s, and Fitch—also failed in their scrutiny of these bonds. Assigning investment-grade rankings, mostly AAA, to virtually all of the mortgage-backed securities they reviewed reflected some combination of superficial analysis and a willingness to sacrifice the integrity of the ratings for future business.
There are collateral explanations for the financial debacle of 2008, including an excess use of financial leverage and lax regulatory oversight, but the root cause was the collapse of the MBS market. And that collapse was the inevitable result of an elaborate “pass the trash” game among financial institutions. Except for the hapless investor left holding grossly overvalued mortgage-backed securities at the end of the chain, all of the parties to the creation and sale of those securities—the mortgage bankers, the investment bankers, the rating agencies—collected handsome fees and commissions but had little or no “skin in the game.” The ultimate losers were not those middlemen but rather four very different types of participants: the tens of thousands of mortgage holders who suffered bankruptcy or loan foreclosure; the many financial institutions that went under due to a liquidity crisis brought on by their use of mortgage-backed securities as collateral; investors, most of them institutional and many international, who held badly mispriced—in some cases worthless—securities; and, most significantly, U.S. citizens, who footed the bill for the bank bailouts and bore the brunt of the Great Recession that followed. According to a report prepared by the Pew Financial Reform Project, the total financial hit has amounted to about $10,500 per American household.13 The damage that resulted from irresponsibly structured and promoted mortgage-backed securities has been long-lasting and monumental.
Devil or Angel?
By the time of the financial crisis, Ranieri had been out of Salomon’s MBS business for more than twenty years—but his legacy as a financial innovator has been haunted by the specter of these bonds and their role in the crisis. In 2004, Businessweek included Ranieri in a list of the seventy-five greatest innovators of the last seventy-five years;14 five years later, he was on the Guardian’s list of “Twenty-Five People at the Heart of the Meltdown.”15 And yet it’s not clear that Ranieri is at all to blame for the MBS debacle.
Undoubtedly, he shook things up. Just as Milken’s junk bonds changed the world of corporate finance, Ranieri’s securitization of the mortgage proved to be a highly disruptive event in real estate finance. In the late 1970s, at the time Ranieri joined Salomon’s newly formed mortgage department, banks and other “depository financial institutions” controlled over half of the assets of the financial sector. But in short order, “balance sheet” loans—those that were made by a bank and stayed with the bank—were replaced by loans made in the capital markets and freely traded afterward. As a result, banks today control less than a quarter of financial assets.16
Yet taking assets out of the banking system—“disintermediation”—has had many benefits for lenders and borrowers alike, including greater liquidity, better transparency, and lower costs. Due to those well-recognized benefits, securitization has spread from mortgages to other assets, including credit cards, student loans, and automobile loans. Even the bread-and-butter commercial loans made by banks have been increasingly securitized into CLOs—commercial loan obligations. On balance, securitization has been a good thing for the capital markets, and in fact, until the financial crisis, the markets in securitized mortgages worked quite well, and there were few defaults among the bonds that were created. It’s safe to say that at the time of Ranieri’s involuntary departure from Salomon in 1987, the mortgage-backed securities and the CMOs he created were still conservative securities, backed by an ample quantity of well-scrutinized home loans that were underwritten according to prudent guidelines. It wasn’t until the early 2000s that the MBS market began to veer out of control. By the time it went off the rails, Ranieri had been long gone from the MBS business.
During the time Ranieri conceived and built the securitized mortgage market he may have been profane, combative, and unpolished, but there is little to suggest that he was in a league with the bad actors that captured and perverted the MBS business during his twenty-year absence. Yet in his public statements, Ranieri paints himself as a villain for what he sees as his role in the crisis. During a 2011 interview with CNBC, he said, “Being one of the founders [of the MBS], it’s my problem. I talked about it starting in 2005, but I didn’t do a good enough job so I bear the burden.”17 In the same vein, he introduced himself at a 2013 conference of the Bipartisan Policy Center, a think tank based in Washington, D.C., by saying, “Hello, I’m Dr. Frankenstein.” He went on to say, “I used to think we had done something important and good, and then, unfortunately, we had the last bubble. The system we built showed the cracks and the clay feet.”18
Since his departure from Salomon, Ranieri has been a successful private investor in business and real estate deals ranging from software startups to home health care, but in recent years he has also stepped back into the residential mortgage business, founding Selene Finance in 2007 to provide “creative loan resolution strategies designed to preserve homeownership”—in other words, an organization meant to oversee (and profit from) working out bad loans. He ascribes his motive in forming the Selene loan-workout firm to personal atonement: “I do feel guilty. I wasn’t out to invent the biggest floating craps game of all time, but that’s what happened. These are real people losing their homes. I feel a responsibility for dealing with it in a way that’s up close and personal.”19 In 2010, Ranieri was a founder of Shellpoint Partners, a securitizer of home mortgages with the ubiquitously displayed mission to provide “responsible mortgage lending solutions.” He has also become an important backer of several Catholic charities and other not-for-profit endeavors.
While Ranieri may find himself blameworthy, hedge fund manager Simon Mikhailovich put it well when he said, “Securitization is like fertilizer. You can grow tomatoes or blow up buildings.” 20 As far as the responsibility for blowing up the mortgage market, there are many who should be standing well ahead of Ranieri in the line to the confessional.
