Lewis S. Ranieri

I would not have written a post on Mr. Ranieri in August of 2008, but given the events of September, I thought some readers might be interested in his career.

In the late 1970's Lewis Ranieri, and Robert Dall of Salomon Brothers saw a vehicle in which their firm could tap into the profits of the housing market--securitization of mortgages. Mr. Ranieri became fabulously wealthy as he rose to prominence becoming a vice chairman with the firm.

He was not born into a life of power and privilege, the type of person we expect to win an important job at powerful investment bank. In a flattering article written by BusinessWeek on November 29, 2004, he is described as follows,

A less likely financial engineer would be hard to imagine. Ranieri, a Brooklyn native, set out to be an Italian chef until asthma ruled out work in smoky kitchens. A part-time job in Salomon's mail room set him on the path to trading...Ranieri also recognized that "mortgages are math." He hired PhDs who developed the "collateralized mortgage obligation," which turns pools of 30-year mortgages into collections of 2-, 5-, and 10-year bonds that could appeal to a wide range of investors. The homeowner in Albuquerque could now tap funds from New York, Chicago, or Tokyo, a change that Ranieri figures cuts mortgage rates by two percentage points. Soon everything from credit-card balances to auto loans was being repackaged.

At least as late as 2004, Mr. Ranieri's innovation was seen as a good thing, lowering the cost of home ownership. It may also have set the stage for what Arnold Kling describes as the suits vs geeks divide. In testimony before the House Committee on Oversight and Government Reform, Kling describes the divide and the problem it causes.

In my opinion, the innovations in mortgage finance over the past twenty years have gone beyond the ability of industry executives[suits] and regulators to manage. Financial engineers [geeks] and key decision-makers were not on the same page concerning the new financial instruments. This suits vs. geeks divide meant that executives were making decisions based on a distorted assessment of the risks involved.

According to Kling's timeline, Mr. Ranieri is off the hook for the financial crisis. He may have hired the geeks, but there was apparently not an information divide between the suits and geeks during his tenure. As reported in the New York Times by Michael Quint on July 15, 1987, Mr. Ranieri resigned as vice chairman of Salomon because of a personality conflict with John Gutfreund, the firm's chairman, twenty-one years before Kling testified.