The Wall Street legend who helped blow up the world explains why his ‘Frankenstein’ creation went so wrong

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  • Lewis Ranieri is considered the father of the mortgage-backed security.
  • His invention enabled millions of Americans to afford homes, but its distortion and manipulation also helped cause the financial crisis.
  • He told Institutional Investor he never imagined ratings agencies and regulators would fail so badly, but also accepted part of the blame.
  • “It’s absolutely true that many of us tried to stop it. But the fact is, it didn’t stop,” Ranieri said. “We, the creators, should never forget.”

In the early 2000s, Lewis Ranieri was named one of the most influential Americans of the past century, before transforming a few short years later into one of the Americans who blew up the world.

Ranieri is the father of the mortgage-backed security, the financial innovation that enabled millions of Americans to afford homes before it was twisted and abused and became a tinder box that helped set the world economy aflame in 2008.

He invented the financial product at Salomon Brothers in the 1970s, and in a recent interview with Institutional Investor for its “War Stories” series he said he never could have predicted how everything came crashing down.

The risks, he thought, were accounted for given the scrutiny of the ratings agencies like Standard & Poor’s and Moody’s, as well as oversight by regulators like the Securities and Exchange Commission.

“We could never have imagined that the ratings services could be bought. That they would basically, just the money would be so important they would break all of their own rules and rate things they knew shouldn’t be rated triple or double or whatever. Ok, and that was unimaginable to me,” Ranieri said.

“And then it was unimaginable to me that the SEC would not intervene. They never did. They were always silent. So all this is going on and they’re nowhere to be seen.”

The intention – to try help those who couldn’t afford a traditional home loan – was noble, Ranieri said, but “the reality becomes ignoble in so many ways.”

“We’ve now created Frankenstein. Frankenstein has a brain, it’s the one we gave him, but the body made up of everybody’s whatever parts they got out of the cemetery has nothing to do with necessarily what we started,” Ranieri said.

Even though he and other creators tried to stop the meltdown from occurring, Ranieri doesn’t deflect blame for the tragedy that befell millions of homeowners and countless others that suffered through the financial crisis.

“It’s absolutely true that many of us tried to stop it. But the fact is, it didn’t stop,” Ranieri said. “We, the creators, should never forget.”

Watch the full interview at Institutional Investor.