Stranger Than Fiction

From the What-The-Fuck? department:

It turns out the co-founder and chairman of recently FAIL'd Franklin Bank, Lewis Ranieri, is the inventor of one of the key ingredients of EPIC ALPHABET FAIL SOUP - the mortgage backed security. Twenty years ago Ranieri began repackaging home loans as bonds and began selling them to investors.

In 2004, BusinessWeek ran:

"As part of its anniversary celebration, BusinessWeek is presenting a series of weekly profiles of the greatest innovators of the past 75 years. Some made their mark in science or technology; others in management, finance, marketing, or government."

BusinessWeek went on to profile Ranieri:

"The past quarter-century has seen a revolution in finance. It's felt every time a homeowner refinances a mortgage or signs up for a credit card. No one person can claim to have lit the fuse for this revolution -- but Lewis S. Ranieri was holding the match. Joining Salomon Brothers' new mortgage-trading desk in the late 1970s, the college dropout became the father of "securitization," a word he coined for converting home loans into bonds that could be sold anywhere in the world. What Ranieri calls "the alchemy" lifted financial constraints on the American dream..."

It seems, however, that Dr. Frankenstein has been eaten by his creation. The irony is delicious. The FDIC is reporting that the deposits of Franklin Bank will be assumed by Prosperity Bank. Did you get that? Prosperity Bank.

But wait, it gets better.

In 1997, Fischer Black and Myron Scholes won the Nobel Prize in Economics for their work on equity options pricing, "a new method to determine the value of derivatives" - the Black-Scholes Model.

A few years earlier, Myron Scholes and several other colleagues from Salomon Brothers founded a hedge fund called Long-Term Capital Management. Starting with $1 billion in investor capital, LTCM was hugely successful (and hugely leveraged) in the first few years with annualized returns of over 40%. The success ended quickly when in 1998 the East Asian/Russian financial crisis caused Long-Term Capital Management to blow up like a propane bomb, losing $4.6 billion in less than four months. LTCM became the poster child for investment risk potential.

Myron Scholes was implicated in the case of LTCM v. United States for using an illegal tax shelter in order to avoid paying taxes on profits. Under oath, Scholes stated that he was not an expert on tax law. The prosecution introduced a textbook titled "Taxes & Business Strategy" written by Scholes, which contained a chapter on step transactions - one of the very concepts that was used to prove the illegal tax shelter.

So, anyhoo.

In 1999, Scholes and several colleagues from LTCM founded another hedge fund called Platinum Grove Asset Management (because hey, the second times a charm), which as of the end of August of this year had almost $5 billion under management. Yesterday, Bloomberg reported that Platinum Grove has suspended investor withdrawals after suffering a 38% loss through the first half of October.

Go to FAIL, do not pass go, do not collect $200.