Lewis Ranieri, a star Wall Street bond trader for Solomon Brothers in the late 1970s, was one of the first to understand the opportunities. His innovation in bond markets would trigger the greatest jeopardy to the national economy since the Great Depression. Ranieri invented the market for mortgaged based securities by exploiting the spread between debt issued by government housing agencies and US Treasuries and corporate debt.
By early 1985, the market he had invented for these securities had burgeoned to $270 billion. In 1988, Ranieri bought Florida 's Bank United, that became a major lender to real estate developers. His bank ownership enabled Ranieri to do for mortgage banking what Ford did for cars: vertically integrate derivative finance from Wall Street trading desks to the issuance of an original dollar of debt through a Florida mortgage owned by a homeowner looking for their slice of heaven in Florida . Ranieri sold the bank in 2000, after tripling his investment in just a couple of years, to Washington Mutual. The hugely profitable formula he had created was about to be taken on a midnight joy ride fueled by Alan Greenspan's historic low monetary policy.
It took less than a decade for Washington Mutual to implode, brought down financial derivatives that had already rained money on lawyers, accountants, bond salesman, Wall Street executives, and an Engineering Cartel. But if you were to ask industry executives about the causes of the historic meltdown that took down Lehman Brothers, Bear Stearns and hundreds of banks around the country to date, they would call it an “accident”, a perfect storm.
It wasn't blameless. In late January 2003, HUD Secretary Mel Martinez, soon to be a US Senator from Florida , layed out Shrub's “Ownership Society” to Vegas homebuilders. “Bubbles of course do burst, but not the housing market… this Administration is making it easier for people to purchase their own homes, including minorities”.
Shrub's “Ownership Society” worked for the benefit of the top CEO's by inhibiting regulation of derivatives while throttling regulation that blocked growth in the fastest growing areas, like California , Texas , Nevada , and above all Florida , where Jeb fast tracked development and construction and killed regulatory barriers. Trust business to use market based mechanisms to protect the Wetlands and Water quality.
In 2003 Fannie Mae CEO, Franklin Raines, earned $20 million by cooking the books of the nation's largest mortgage clearinghouse. Raines left Fannie Mae in 2004, after it made a $6.3 billion restatement of earnings. There was more, much more to come.
What Franklin Raines achieved could never have happened without the cheering throngs of homebuilders and politicians who were trading contributions and favors by the boatload. Surely, such a solid basis for wealth could not turn against its participants. AIG sold insurance to anyone anyway. More than $90 billion in Fannie Mae shareholder value was been wiped out. In 2006, the OFHEO sued Raines in order to recover some or all of the $90 million in payments made to him on the overstated earnings. But, a paltry settlement allowed him and two other executives to keep the bulk of their riches.
The massive wealth destruction that is transforming the US economy is still a work in progress. There is still no accountability of those CEO's and their corporate boards that unleashed so much jeopardy to our national economic security. It used to be called "the free market" but for a select few, it truly was money for nothing.
Excerpted from Alan Farago
