A Buyer's Guide to Seized Bank Assets

The thrift and banking crisis has - in a major way - put the U.S. government in the business of buying and selling in the asset marketplace. The crisis has also led to vastly expanded relationships between private business and the government.

Until the thrift firestorm ignited, the highly regarded and user-friendly Federal Deposit Insurance Corp. worked away quietly and efficiently.

However, the dramatic increase since 1989 in the number and complexity of transactions, and the heightened political interest, have given rise to a situation in which asset sale issues previously handled with flexibility are now dealt with in a more formal process.

In this environment, the growing number of prospective asset buyers from the private sector are encountering cultural and legal ground rules considerably different from those of the private marketplace.

So, how does a potential investor in bank assets deal with this environment? Let me suggest some guidelines.

Pull No Strings

Do not use political connections. While there are always public policy issues involved in these transactions, you shouldn't mix political issues with your business project.

Deals are often complicated, and your special friend in the White House or the Congress won't necessarily have the time or the inclination to fully understand the specific transaction. You can be almost certain that political interference will slow the process and can, under some circumstances, be materially counterproductive.

Work honestly with the media. The Washington press corps is like no other press corps you have ever experienced. Its members are usually well-informed (through official and unofficial leaks) and have been educated enough to ask the right questions regarding any transaction.

If you can't talk about a deal, just tell them you can't. If all disclosure must come from the FDIC, then tell them that. Don't be unavailable and don't ever, ever lie. When and if it is appropriate, give them all the details. Having the real facts spelled out on the record will serve you well in the long run.

When there is more than one regulator involved, deal with each one on your own. Don't reach the conclusion that the government will automatically coordinate various agencies involved in the approval process. You or your lawyers and/or your investment bankers must handle that coordination or at least monitor it.

Start the process early, particularly if you are not in contact with the various regulators as a matter of course. Bank regulatory agencies, like all agencies, have a tendency to be turf-conscious, so it's important that all principal agencies involved in your deal be kept informed on a regular basis and in parallel.

Anticipate a changing world. One of the key criticisms of the process cited by investors is the risk of the government reneging on terms, as in thrift transactions that occurred before the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

Congress can be capricious and may indeed change the rules; that's one aspect of Washington that we must live with. Don't blame the FDIC - just be prepared to deal with changes in the political world. While the laws may change, the opportunities keep coming. If you can't be flexible and adaptable to a highly unpredictable environment, this is not the game for you.

Make Deals in the Open

Learn to love disclosure. Documented disclosure of government transactions is an absolute must.

In private-sector transactions, the seller is the party most vitally concerned with fairness opinions that indicate the board of directors has done a reasoned job in pricing an asset at the time of the sale.

In the public sector, it is equally important for the buyer to have a comprehensive and open record demonstrating that the value paid was reasonable in the light of all prevailing conditions at the time of the trade. Complete disclosure now precludes costly second-guessing later.

Know the Regulator's Goals

It's also important to anticipate and accomodate policy concerns. In any business transaction, it makes sense to understand the real objectives of the other side. Sellers of assets in the private sector, more often than not, want to achieve the highest possible dollar return and normally would like to be perceived as having done a clever deal.

Government regulators selling an asset also have objectives, so it is useful to understand their goals and help achieve them within the context of a specific transaction. What does the government bureaucrat want to achieve in selling you an asset? There are four simple points to keep in mind:

* Significant equity investment must be there to ensure that old problems do not reappear at a later date.

* Closely associated with that is the need to see respected management experience as part of the new operation.

* The transaction should provide consolidation in the marketplace, particularly to reduce the number of financial institutions serving an over-banked market.

* More than anything, the government needs terms that can be properly defended as providing the best return for the government, while solving the problem.

Keep It Simple

Don't be afraid to be creative, but don't become so creative that you lose your audience.

Some deal structures that may be completely appropriate in a free, competitive, and risk-taking economy may be inappropriate for an institution with access to insured deposits and the Federal Reserve discount window.

Also, keep in mind that there are many levels of decision-making in the government process - and overly complex structures that are difficult to understand can put your proposal at a disadvantage.

If the FDIC gives you documentation to use in your bid, use it; and where you don't, quantify the economic cost of changing specific provisions. If you don't, you run the risk of regulators doing that calculation for you and coming up with different results.

Be creditable. Many groups have come to investment bankers in the past few years asking for help in acquiring a government asset. But their available financial firepower was inadequate. When that happens, the group loses the deal and often the credibility to do subsequent deals.

Be patient. By definition, business done in Washington takes longer. In certain cases, this could create opportunities since many investors don't have the stamina or institutional patience.

Keep in mind that the FDIC is a more than willing seller with a great deal of clout, so while it may take a little bit longer to steer through preliminaries, a well-prepared transaction will usually close.

Don't underestimate the talent of bureaucrats. During the course of my career, I held three management jobs in government, and I can say without question that federal government employees are among the best I have ever worked with in the public or private sector.

While bureaucrats are not measured on the basis of profit and loss, they do have a commitment to getting the job done. They respond very poorly to being patronized.

Working your way through the myriad thickets of the government is a daunting challenge for the uninitiated.

Following these few simple guidelines could help you in the process. Ongoing asset sales present challenging and extraordinary opportunities for investors with the financial resources and determination to pursue them.

Mr. Zarb is chairman and chief executive officer of Smith Barney, Harris Upham & Co., New York. From 1974 through 1977, he was the senior official for national energy policy - the "energy czar" - under President Ford.

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