Uncle Sam's bank deals need more disclosure

(breakingviews.com) -- Investors often demand more disclosure on mergers and acquisitions. But taxpayers -- who have billions at stake in government bailouts of financial firms -- are justified in feeling envious of the information provided when privately held, publicly listed companies do deals.

A lower level of prompt disclosure from government entities might have been acceptable in the pre-crisis, hands-off days. But now the Federal Deposit Insurance Corporation, the Treasury and other limbs of government are deep into the financial sector. Especially in light of President Obama's commitment to transparency, a failure to rise to a new level of disclosure could risk a loss of public trust.

FDIC's recent sales of failed banks to private equity firms are a case in point. Though taxpayers aren't directly on the hook -- the agency is funded by the fees it receives from banks whose deposits it insures -- the government does backstop it. If FDIC's deals give away too much, taxpayers will eventually foot the bill.

Selling out at a loss to taxpayers may be the least costly way out. But there are reasons for concern. Private equity firms are in business to make big money on distressed investments -- and they're not known as vultures for nothing. To enable outsiders to assess deals, the benchmark for disclosure probably ought to be what a publicly listed company would reveal about selling itself or a big operating division.

FDIC doesn't typically make such comprehensive disclosures. Take the recent case of BankUnited. In line with its usual practice, it released a brief statement saying the private equity buyers would stump up $900 million of new equity to receive $12.7 billion in assets and take on $8.3 billion in deposit liabilities.

The release talked about a loss-sharing agreement between the private buyers and FDIC, but gave no details; and it said the deal was expected to cost FDIC's insurance fund about $4.9 billion, again without further explanation. FDIC said the sale was the "least costly resolution" for BankUnited.

The agency also released a 126-page agreement for the sale. Drill down into this, and FDIC also appears to be handing north of $2 billion in cash to BankUnited under its new owners to help provide the agreed cushion against losses on $14.1 billion of gross assets on its books (before pre-existing loan loss reserves). In the loss-sharing deal, FDIC will shoulder 80% of further losses up to $4 billion, and 95% thereafter.

Even both documents together don't tell the whole story. FDIC's initial releases are designed to minimize concern among depositors as well as convey information, and the agency did address follow-up questions. But it hasn't publicly presented the entirety of information needed to analyze the deal. It isn't obliged to -- but maybe it should.

Publicly-listed companies' disclosure isn't perfect, but they typically host conference calls and, fairly soon after, make detailed regulatory filings explaining the logic for a significant sale and often revealing the legal documentation and the process that led to the deal. FDIC, for instance, says it approached dozens of potential buyers, but hasn't explained how they were weeded out -- which might reassure taxpayers.

Moreover, the Securities and Exchange Commission, in its advice to publicly-listed companies, doesn't want them to dumb things down: The regulator's guidelines for "plain English" call for a clear presentation of complex information rather than any glossing over.

Of course, anyone could request more information from FDIC under the Freedom of Information Act. But that could take weeks or months, and requires all the right questions to be asked.

FDIC does at least have long-established processes for dealing with bank failures. By contrast, there's no precedent for the government's massive involvement in American International Group (AIG, Fortune 500). Yet information on its plans for the crippled insurer is thin on the ground.

Another area where further information would help is the Treasury's approach to warrants associated with investments it made in banks. In one early case -- Old National Bancorp -- the Treasury seems to have agreed a low price for a bank to buy its warrants back. There may be a strong rationale, but the Treasury hasn't made it clear.

In these cases and others, the scale of recent government intervention would call for a rethink of communications even if Obama hadn't called for more transparency. But he has; if officials don't open up more than they are used to, they shouldn't be surprised if taxpayers become suspicious.