Good for New York Senator Chuck Schumer. He has asked the Treasury Secretary to explain something that the Treasury has been doing a good bit of lately--providing a relaxation of the Internal Revenue Code for particular players, in the name of "relief" necessary in connection with the bailout. But much of this "relief" has very long-term consequences.
Let me be clear. As I have noted in prior postings, we already have to worry about various problems inherent in the hastily devised bailout that still left out many of the protections that various scholars and others suggested should be included (i.e., no real oversight; too much discretion to Secretary Paulson to play favorites; no provision to prevent use of taxpayer funds to pay dividends to shareholders; no say for taxpayers in the companies' management in return for our equity injection of cash; no guarantee that banks will use the cash to provide reasonable loans to businesses and consumers to make up for the credit crunch; in fact, a great potential for misuse of the cash--supposedly provided to ensure that banks continued lending through the liquidity crisis--by banks that are hoarding the cash to use in acquisitions to get bigger, when the acquired companies may not even be failing banks, and the "getting bigger" result may just leave us with more financial institutions that are "too big to fail", further socializing the losses).
But the Treasury has also been taking a number of other actions that are very worrisome, since they amount to long-term abrogation of the tax laws, in favor of a few select players that happen to be in the industry that has mightily screwed up and caused this financial crisis that is quickly becoming an economic nightmare for Main Street America.
Here's an example--Notice 2008-83 was issued by the Treasury Department. It suspends, without any statutory authority for the action, the anti-abuse rule in section 382(h) that prevents healthy banks that merge with those that have significant built in losses in their assets (i.e., smaller banks with lots of bad mortgage loans) from using those losses to shelter the healthy banks' income and eliminate tax liabilities for perhaps years to come. That means that the notice provides tax relief to Wells Fargo in connection with its takeover of Wachovia, the troubled bank that Citibank was originally planning to snap up. Wells Fargo will enjoy substantial tax savings from Paulson's taxpayer-friendly action. See Morrison & Foerster description of the Notice, here; Cleary Gottlieb description, here.
The notice amounts to a "major tax incentive for buying or making a major investment in banks," according to Jones Day. See Major Tax Incentive for Bank Purchases, Jones Day, Oct. 2008. That suspension of the anti-abuse rule may result in $140 billion of tax savings for the healthy banks taking advantage of this . Id. As Grant Thornton says, this is a "very taxpayer-favorable new notice."
If banks use taxpayer money from the bailout to fund such acquisitions, they've really got a great deal. Taxpayers, by means of the Treasury, provide a lot of the money to let the healthy bank buy the other bank, then the healthy bank uses the Treasury's unauthorized forbearance on enforcing the law on the use of built-in losses to claim billions of dollars of losses and lower the taxes that the bank has to pay in the future. All the benefit of the bailout to the bank. No burden of doing public good at all. And guess what--there probably isn't anyone with "standing" to challenge the Treasury's action. Taxpayers are viewed as not having standing to challenge tax actions--too general, it is said, so that there is no particularized harm. Of course, the taxpayers who benefit--the big banks getting to use taxpayer money to buy other banks and then getting to use the losses to protect their real income from taxation--won't suffer a harm (they get a benefit) and wouldn't want to challenge anyway. This standing issue is a perennial problem for bad tax actions by tax administrators.
So good for Chuck Schumer, who has written Paulson to ask for an explanation for this action taken without even consultation with the Congress on administratively "overriding" (or more directly, refusing to enforce) the law. See, e.g., Jonathan Stempel, Schumer Questions IRS Rule Aiding Wells-Wachovia, Reuters, Oct. 30, 2008. Schumer notes that Wells Fargo would save $19.4 billion in taxes under the notice--more than the $15.1 billion it paid in stock for the deal, which was cemented a mere three days after the taxpayer-favorable ruling by Treasury. Schumer also pointed out the problem of encouraging consolidation of banks, when banks that got to big were a major factor in the current economic situation.
Congress should act to undo the Treasury's administrative action. We've had enough giveaways to big banks. There's no justification for this one.
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