Who Is Lewis Ranieri?
Lewis Ranieri (b. 1947) is a former bond trader and former vice chair of Salomon Brothers who is credited with popularizing the concept of securitization to the financial world. Ranieri's securitization revolution allowed all sorts of cash flows from debts (such as credit cards, mortgages, etc.) to be pooled and rolled into bonds.
- Lewis Ranieri was a successful bond trader and then executive of the global investment bank Salomon Brothers in the 1970s and 1980s.
- During his tenure, Ranieri popularized and developed various financial products based on the securitization of cash flows and debt obligations.
- Securitization involves pooling cash flows from similar instruments and bundling them into single bond-like securities that can be sold to investors, such as mortgage-backed securities (MBS).
- Because cash flows come in from various loans or borrowers, any single default should not matter in the overall pooled portfolio, thus reducing risk. The 2008 financial crisis, however, showed this to be a fallacy.
Understanding Lewis Ranieri and Securitization
In 1977, savings and loans banks were feeling the financial difficulties involved with funding short-term, higher-interest demand deposits with longer-term, low-interest mortgages. As a result, banks did not want to hold too many mortgages. This limited mortgage issuance and suppressed the housing market. Lewis Ranieri came up with a novel solution where he created five- and 10-year bonds from 30-year mortgages. These new mortgage-backed securities (MBS) helped Ranieri attract a larger crowd of investors, taking the mortgages off the banks' books and allowing them to issue fresh mortgages as the existing ones were sliced up and sold off.
Lewis Ranieri wasn't the sole mind behind the creation of the mortgage-backed security, but he was the greatest champion when it came to ensuring that the new investment prospered. In addition to the MBS, Ranieri played a role in the creation of the collateralized mortgage obligation (CMO), another complex repackaging of debt.
However, the practice of securitization, once articulated, spread like wildfire through the financial world. To this day, securitization plays a critical role in everything from credit card debt to the national debts of developing nations. Ranieri left Salomon Brothers to found Hyperion Partners before founding his current venture, Ranieri Partners, an advisor and manager of private investments.
Initially, MBSs were only acknowledged by a handful of states as legitimate investments, but Ranieri's actions eventually led to federal government measures that supported these securities as a valid investment asset class, leading to the development of the bond market. For this reason, Ranieri is seen as the father of securitization.
Lewis Ranieri's Role in The Big Short
Lewis Ranieri was well known in financial circles for his primary innovation of securitization and his lobbying efforts that saw the MBS become a critical financial instrument for the real estate market, but he was not publicly well known until the movie The Big Short (based on the Michael Lewis book by the same name; no relation) highlighted his financial innovation and its role in the mortgage meltdown. Ranieri reflected the blame for his role in the crisis back upon Wall Street and the lenders for abusing the system of securitization to create subprime loans and teaser rates that almost guaranteed a homeowner would default long term.