Regulators' information monopoly is an impediment to investors

A Wall Street Journal Heard on the Street column provides yet another example of how the financial regulators' information monopoly causes investors difficulty in evaluating and properly pricing the risk of banks.

Here's a lesson for the government and Ally Financial in particular: With bank investors fretting about the potential costs of soured-mortgage claims, it is best to get the details out in the open. 

That's the opposite of how Ally and Freddie Mac handled a payment last year of $325 million by the firm to the mortgage company to settle mortgage-repurchase claims. Neither Ally, General Motors' former financing arm now majority-owned by the government, nor government-owned Freddie disclosed the amount of the settlement when it occurred. The fact that a deal was struck at all was only disclosed by Ally and Freddie in quarterly securities filings. 

The $325 million payment has now come to light only in an exhibit tucked deep within an amended offering document recently filed by Ally as part of a planned sale of shares to the public. And that disclosure only happened after prompting by the Securities and Exchange Commission. 

This episode underscores the challenge for bank investors trying to assess risks posed by demands that banks repurchase soured mortgages. Concerns over legal risk, along with fears of a weakening economic outlook, have weighed on bank shares of late. 

... The problem is the lack of detailed disclosure. Even now, neither company has disclosed the amount of loans covered by the settlement. That makes it hard for investors to know how to interpret the deal and how tough a negotiating stance the government took. 

The government's role is central. It controls Freddie and Fannie, which guaranteed trillions of dollars in loans originated by banks and, with their value sinking, have demanded that banks repurchase billions of dollars of them. And investors have to question how the government is balancing the need to lessen taxpayer losses at Fannie and Freddie against a desire to avoid actions that may destabilize banks, like playing hardball on soured-loan repurchases. 

This has broad implications. Fannie and Freddie's regulator, the Federal Housing Finance Agency, is nearly a year into an inquiry of private-label mortgage securities sold by banks to investors, including Fannie and Freddie. While banks already have settled some claims for repurchases of soured mortgages with Fannie and Freddie, the FHFA could decide banks need to repurchase more. Bank of America, for example, has $222 billion in at-risk, private-label securities that weren't covered by past settlements with Fannie and Freddie. The bank hasn't said how much of these are owned by Fannie or Freddie. 

Understanding the economics and rationale behind settlements such as the Ally deal are, therefore, important for both bank investors and taxpayers. The lack of disclosure cuts both ways. In January, some members of Congress questioned whether mortgage settlements with BofA and between Ally and Fannie actually were back-door bailouts. In other words, the deals may have been too favorable to the banks. The FHFA's response that the deals were in Fannie's and Freddie's best interests hasn't resolved the uncertainty. It said detailed information concerning the agreements is proprietary. 

That may be the case for normal companies. But Fannie and Freddie, which have received $138 billion in taxpayer funds, aren't normal. As Democratic U.S. Rep. Maxine Waters said in a letter to the FHFA, loan-repurchase agreements involving them are "a matter of critical importance to the public interest," and so "transparency is therefore essential." 

It's bad enough the government is influencing the market in so many ways. The least it can do is be clear about its actions.