- The Washington Times - Wednesday, May 21, 2008

Franklin Bank Corp., the Texas bank led by mortgage bond pioneer Lewis S. Ranieri, might seek a buyer after an internal probe of lending practices led to the removal of a top executive and sparked an inquiry by federal regulators.

Mr. Ranieri, chairman of the Houston bank and former vice chairman of Salomon Brothers Inc., is interim chief executive officer now that Anthony J. Nocella has been ousted, the bank said late Monday. A 10-week internal probe found “accounting errors” tied to real-estate loans, and the Securities and Exchange Commission is investigating, Franklin officials said.

“They have a lot of people in there talking to them” about a takeover, mainly private-equity groups, Daniel Bass, a managing director in Houston for investment bank Carson-Medlin Co., said Monday before the disclosure. “There’s value there, but there are too many unknowns. I don’t think a Texas bank would touch it because there’s too much risk.”

Franklin’s stock has plunged more than 90 percent during the past 12 months of Nasdaq trading. That’s not what investors expected when Mr. Ranieri, now 61, formed the company in 2002. He had helped turn New York-based Salomon into Wall Street’s most profitable firm during the 1980s by being one of the first to package mortgages and sell them as securities.

He tripled the market value of Bank United Corp., a Houston bank that he sold in 2001 after 12 years at the helm.

Mr. Ranieri enlisted five former Bank United executives to run Franklin. The bank sold stock to the public in 2003 at $14.50 a share, and it peaked at $21.88 in October 2006.

Mr. Ranieri predicted at a December 2006 industry conference that defaults on subprime mortgages in the U.S. would be worse than analysts estimated, said Bert Ely, an Arlington-based banking consultant.

“He gave a blood-curdling talk about the dangers of securitization,” Mr. Ely said. “When you have one of the fathers of mortgage-backed securities saying that, it was very scary stuff.”

While Franklin avoided subprime mortgages, which led to $379 billion of write-downs and credit losses at the world’s biggest financial institutions, housing-related loans caused losses at its bank unit of $87 million over the past two quarters, according to regulatory filings.

About a third of Franklin’s $3.9 billion in loans are to home builders, while about 40 percent of its residential mortgage loans are in California and Florida, two states suffering some of the biggest home price declines.

Franklin hasn’t filed its holding company’s first-quarter financial statement because of an ongoing internal investigation, and earlier this month the bank said its previously released fourth-quarter report - which included a $66 million loss - can’t be relied upon.

The bank’s investigation concluded Franklin didn’t account for the impact of loan modification plans, failed to charge off home loans deemed uncollectible and didn’t write down values of real estate taken over in foreclosures.

The stock, which sold for almost $22 less than two years ago, fell 3 cents to close at 98 cents yesterday on the Nasdaq Stock Market.

“There seems to be no bottom in housing,” said James Miller, a Carlsbad, Calif., banking consultant and founder of ebankstocks.com. “Franklin’s stock price is saying it’s over.”