Fun With Tax Giveaways
Amit Paley reports for The Washington Post on a staggering tale of an illegal windfall for banks inserted into the $700 billion rescue package by the Treasury Department. “Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no,” George K. Yin, the former chief of staff of the Joint Committee on Taxation, told Paley. “They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks.”
The financial world was fixated on Capitol Hill as Congress battled over the Bush administration’s request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.
But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.
The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. 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.
Read the whole thing, as they say.
28 Responses to “Fun With Tax Giveaways”
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November 10th, 2008 at 1:15 am
Bloody redistributionists!
November 10th, 2008 at 5:46 am
Just wondering. How far would $140 billion go towards the expenses incurred by the FDIC if these banks had failed and had to be taken over? Seems like an awful lot of money to me.
As I understand it, the government tries to get a stronger bank to take over a weaker bank so that the FDIC (the government) doesn’t have to intervene. Somehow that is better for the taxpayers. Using a $140 billion bribe to make another “too big to fail” company seems counterproductive.
The program of the Bush administration is to privatize everthing no matter that it ends up costing the taxpayers more money.
Forgoing tax receipts is the same as giving government grants. They just end up under the radar.
November 10th, 2008 at 6:57 am
The Fed and Treasury are operating under the rule that it’s much easier to ask for forgiveness than to ask for permission. As for the law, teeheehee hahaha. Get real, we don’t need no stinking laws.
The Treasury and the Fed are running something like 10 special programs to bail out various things and as far as I can figure out most of them have never been funded by appropriations. The Treasury has deposited with the Fed $559 billion since 9/17, money all raised by borrowing. In other words real spending and most of it has never been authorized by legislation. So getting all worked up by some accounting trick that will lower taxes for some banks in the future is kind of silly.
November 10th, 2008 at 7:26 am
This is why we should have followed Britain’s lead and nationalized the suckers. If you leave management in charge, the people who caused the problems will use the crisis as an opportunity to rob you blind.
Paulson belongs in jail for this.
November 10th, 2008 at 7:46 am
I am sensing some possible ideological incoherence in Matt’s recent posts.
Matt has said he thinks too many smart people, lured by the possibility of high salaries, have gone to work in the financial sector. Matt has also said he opposes structuring bailouts in a way that preserves the existence of poorly-managed firms. So one would think Matt would agree with Treasury’s view that the banks which made better decisions recently should be taking over banks that made bad decisions. That eliminates the poorly-managed firms, and indirectly will lead to fewer high-salaried slots in the financial sector.
But crucial to that working is making sure the good banks actually agree to take over the bad banks. And that is what this is really all about: this notice makes it possible for the Treasury to arrange these shotgun weddings, because otherwise the good banks would not want to take on all the liabilities of the bad banks. Indeed, long before now people had noted that this tax rule as previously enforced had the unfortunate effect of discouraging takeovers of some entities most in need of takeovers (the ones with lots of assets but even larger liabilities). Of course the original point about firms gaming the system with shell companies holding liabilities was legitimate, but that isn’t what is happening with the likes of Wachovia and National City–those were real companies with real assets in dire need of takeovers.
A couple final notes on taxpayers:
(1) Just upping FDIC funding isn’t enough to address these issues. This is a complex topic, but the FDIC has long preferred the “purchase & assumption” approach, in which the FDIC arranges a sale of the liabilities of the failed bank to another bank, over the “payout” approach, in which the FDIC pays off the insured depositors and liquidates the bank, even though the “purchase & assumption” method ended up costing the FDIC more money in most cases. The precise reasoning under normal times for this preference was that widespread use of the payout approach would undermine public confidence in the banking industry, and that is going to be even more true now as the last thing the banking industry needs is less overall deposits (since with tightening leverage policies, less deposits would mean less lending, and the economy needs more, not less, lending). So really it is just an accounting issue: some entity was going to have to take on the cost of making sure the liabilities of failing banks were purchased, and shifting that burden formally to the FDIC wouldn’t have changed the magnitude of that cost;
(2) But the good news for taxpayers is that they are actually getting a piece of the action. The broader context is that the good banks are selling preferred stock to the government to get the capital they need to buy the bad banks, and then also getting this tax writeoff to make buying a bad bank, liabilities and all, a potentially good deal for the good bank. But since the taxpayers now own preferred stock in the good bank, if the merger is in fact a good deal, the value of that preferred stock should increase as a result.
In short, this all gets back to an issue we discussed before, which is that the Treasury doesn’t actually have the people it would need to directly take over and run all the assets of all the banks that might fail (and that might not be a great idea in any event). So, it is basically deputizing the good banks to do that job, but hopefully if it gets all this right, the taxpayers will actually end up sharing in the profits as well as the costs of this necessary reorganization.
November 10th, 2008 at 7:55 am
Walker,
Well, in a sense the government is “nationalizing” these banks. Again, the two things that are going on is that the Treasury is injecting capital into the good banks by buying preferred stock, then arranging for the good banks to use that capital to buy the bad banks.
Indeed, the practical alternative would be something like trying to inject capital directly into the bad banks by buying preferred stocks in them too. But why would that be a better idea? Indeed, some of these banks had previously gotten capital injections from private sources and ended up failing anyway, so it doesn’t seem wise for the taxpayers to repeat that mistake.
Again, though, people seem to think it might be possible for Treasury to actually do the takeovers directly as opposed to through the good banks. That really is not possible, and it fundamentally comes down to a staffing issue: the Treasury does not have the people it needs to run all the banks that may have to be taken over, so needs to deputize the good banks to do that job.
November 10th, 2008 at 8:09 am
The banks and financial sector are not being socialized. The Treasury is being privatized.
No one story or description of events is ever right. My story above, the obverse of the usual story, is one that should always be in the mind.
November 10th, 2008 at 9:00 am
I don’t know that it was so well hidden. Wells Fargo is usually the savviest player in the banking world and they declared very loudly that the loophole was a key reason for their desire to take over Wachovia. This news was on the front page of the WSJ for several days and reported on in real time.
November 10th, 2008 at 10:36 am
My little fantasy
Secretary Summers says that the law says what the law says and he and President Obama sue the companies for back taxes (and win).
The companies counter sue the treasury saying their shareholders were hurt by the mergers which only made sense ecenomically if Paulson had the authority to overrule congress. Judge says the law says what it says and the US treasury is not responsible for the miss-conduct of every employee — sue Paulson, he’s the one who deceived you.
They do and win and Paulson forks over all of his wealth.
November 10th, 2008 at 7:43 pm
The rule was there to dissuade bank mergers, due to fears in the 2008-22=1986 era of interstate competition and cheap M&A capital. It was a preventative measure against the formation of One Big Bank, or the possibility that the sharks would twine themselves into something important and bring it down when they crashed.
Now Treasury wants to lift it because they want to enable mergers so the failing banks can be swallowed intact. The alternative being to go into bankruptcy and have the assets sold piecemeal (which would, in essence, replicate the part of the sharky approach people liked least).
So, essentially they’re trying to suspend the anti-shark rule so as to not punish the banks for foregoing the sharky route.
That said, this does in fact illustrate how tasking anyone with a mission to remake the economy will inevitably entail, even require an incredible grant of power. Incredible grants of power are awfully problematic though arguably necessary and the best practice seems to be to formally provide for their duration and dissolution at the get-go. If the office manages to institutionalize itself and build its iron triangles – and it’s hard to see it not straining in that direction even as a nonvolitional byproduct of its normal functioning – it’s an incredible weapon just waiting to be picked up. Robert Moses held veto over over anything in New York State or City for a few decades largely on the basis of an open-ended grant to issue debt (even with a set debt ceiling).
The power to create money is at the foundation of government-in-practice, on an equal level and mutually reinforcing with the power to kill (who protects the treasury?/how do you pay the killers?) which is why in many systems – including ours – the palace guard also guards the treasury. Which brings us to the interesting question – if the Treasury ever does get to the point it challenges the White House, which side does the Secret Service take?
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NEW YORK – US BANK Wells Fargo said on Monday it had raised US$12.6 billion (S$18.8 billion) in a stock offering in preparation for its acquisition of rival bank Wachovia. ‘This is the largest issuance of common stock by an
December 6th, 2008 at 11:04 pm
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