More on the Bailout: Treasury's "Override" of Enacted Law

Just before Halloween, I discussed the several Treasury notices overriding enacted law governing the ability of acquiring corporations to use "net unrealized built-in losses" of acquired corporations.  See More on the Bailout: Schumer Probes Treasury Handling.  Notice 2008-83 suspends the rule in section 382 that disallows use of a net unrealized built-in loss, without citing to authority.  Although some in Congress seem disturbed by this action (Grassley called it astonishing), it is not clear that this hitherto rather weak Congress will stand up and take action to block Treasury's rewriting of the law. 

These points are clear in Amit Paley's report about the Treasury override of Congress, by which conservatives got something they couldn't get through legitimate action in Congress, in the Washington Post today. 

When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.  ...  Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers. 

***

Andrew C. DeSouza, a Treasury spokesman, said the administration had the legal authority to issue the notice as part of its power to interpret the tax code and provide legal guidance to companies. He described the Sept. 30 notice, which allows some banks to keep more money by lowering their taxes, as a way to help financial institutions during a time of economic crisis.  Amit Paley, A Quiet Windfall for U.S. Banks, Washington Post, Nov. 10, 2008.

Furthermore, the Notice is striking for more than just an usurpation of authority.  It is extraordinarily costly (perhaps as much as $140 billion of foregone revenue) and selectively favorable to "healthy" banks that acquire banks with losses, a measure that Paulson had said he wants to encourage through the use of bailout funds but which has not been vetted by Congress and was not intended to be a result of the bailout funds.  As Citizens for Tax Justice noted in their November 7 release on this issue, "the new rules give an artificial competitive advantage to banks that can afford to expand now by effectively offering a tax break for acquiring other banks." Furthermore, as CTJ points out, the new rules will also be costly for state governments.  Since most states follow the federal tax law (with adjustments), federal tax cuts result in state tax cuts.  At a time when state budgets are suffering, from New York to California, this blow by the Treasury may be the straw that broke the camel's back.  States that tax financial institutions' profits may become unwitting and unwilling funders of aggressive consolidation of banking companies.

Comments

[Divorced one like Bush]

Did you hear the story about the unitary executive? It's about a person who started a war in order to be commander in chief. As such, that person now has the authority via legal opinion of an appointed attorney to do what ever is necessary to save the country. Also, because they are unitary, this opposing group known as a congress can not interfer with the unitary executive's authority.

It's a comedy. See, the unitary executive is not the one who thought it up. The unitary executives VP came up with this idea. But, the VP did not want all the fanfare of being the unitary executive. The VP just wanted the ability.

Really, it's rather humerous.

[Matt]

Always a big conspiracy with you libs. The Treasury's timing is a bit off, since not many banks will take advantage of it (and it will likely just be a one year tax shelter), but I would certainly prefer profitable banks purchasing the toxic assets as opposed to the taxpayers. Either way, taxpayers are footing some part of the bill, but the banks would be ultimately responsible for their decision to buy the other banks. More relevant to this article, yeah, Congress should probably be involved given that it is a deviation from the code, not just the regs, but Congress really sucks right now.

[LindaMBeale]

Matt, doesn't it even pique your curiosity that Treasury is bending over backwards to provide every (taxpayer-funded) break imaginable to Big Finance, but won't use a little of the money under its discretionary power to come to the aid of the Big 3 auto makers? Helping the Big Banks helps the corporatist agenda, but helping the Big 3 would primarily save jobs, at this point,--ie, help ordinary Americans who are being pummeled by the recession, whereas not helping the Big 3 is a labor-busting measure.

We already know that Wells Fargo will take advantage of the break--which is hardly justifiable for a healthy bank that already has bailout funds. The PNC deal is also advantaged by this tax break. Don't know what makes you think it is just a one-year shelter--under the pronouncement, it is an ongoing ability to use the losses against the acquirer's income.

And your other point doesn't hold either. Citi was going to purchase Wachovia WITHOUT the tax break that Wells got, so we are funding Wells in ways that were not necessary to have a "good" bank take over Wachovia's losses.

As far as letting Treasury decide that Congress "sucks" and therefore deciding on its own to disregard explicit legislation, I find that problematic. As Divorced One Like Bush notes, it reeks of "unitary executive" thumbing of the nose to Congress whenever it pleases.