FDIC on back foot thanks to imperfect disclosure

February 16, 2010

The Federal Deposit Insurance Corp (FDIC) is on the back foot thanks to imperfect disclosure. A web video critical of the U.S. agency’s sale last year of failed IndyMac Bank has elicited a defensive clarification. FDIC could have been clearer when the deal was done.

When FDIC sold IndyMac to OneWest, a bank owned by private equity investors, it agreed to share losses based on the original face value of the loans — while, as the video pointed out, IndyMac’s buyers bought the loans at a discount. The implication was that this structure meant FDIC would over-compensate the buyers for losses on loans.

The video contained errors, including failing to explain that FDIC is only sharing losses on a fraction of the loans bought by OneWest. Moreover, the buyers also have to lose more than $2.5 billion before the agreement kicks in. So the buyers aren’t getting anything like as sweet a deal as the video implied. And without some loss-sharing arrangement, FDIC might have struggled to sell IndyMac at all.

Still, the video gained such traction on the Internet that FDIC felt the need to respond on Friday. The details it clarified weren’t in the initial press release announcing the sale of IndyMac, nor were they presented clearly as more details of the sale were released.

Of course bank deals are complicated. But had FDIC made more effort to explain fully at the time — at least on a par with the disclosure required of deals between companies with public shareholders — there would have been less fuel for public skepticism now.

It doesn’t help in the IndyMac case that the buyers were private equity firms, which have a reputation as secretive corporate raiders. But for those representing taxpayers in such transactions, it shouldn’t be hard to spot that the fullest possible disclosure is the best course.

The New York Federal Reserve is learning that lesson over the American International Group <AIG.N> bailout. The regulator’s efforts to limit the company’s disclosure of certain payments made to the likes of Goldman Sachs <GS.N> have led to more criticism than is justified of the payments themselves. In a post-bailout world with government tentacles spread widely, authorities dabbling in the private sector court criticism if they don’t strive for maximum transparency.

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