Janet Tavakoli and Gretchen Morgenson

A Bank Crisis Whodunit, With Laughs and Tears

By Gretchen Morgenson

New York Times – January 30, 2011 (online Jan 29)

We already know, of course, that our government moved mountains to help the banks during the crisis. But the report adds to our understanding of events by describing how the Treasury Department changed the tax code to benefit banks acquiring weaker institutions. Never mind that the Constitution allows only Congress to write tax rules. [Emphasis added.]

I.R.S. Notice 2008-83 came out of nowhere on Sept. 30, 2008, the report noted on Page 371. It removed existing limits on the use of tax losses that could be taken by a bank when it acquired a troubled institution. The change appeared just as Citigroup was mounting its $1-a-share bid for Wachovia. (The beleaguered bank was headed by Robert K. Steel, a former under secretary of domestic finance at Treasury who had left his post two months earlier. “Secretary Paulson had recused himself from the decision because of his ties to Steel,” the report said, “but other members of Treasury had ‘vigorously advocated’ saving Wachovia.”)

Two days after the tax change, Wells Fargo topped Citi’s proposal by offering $7 a share. The change in the code had made such a deal more economical for Wells because it could reduce its taxable income by $3 billion in the first year after acquiring Wachovia. Previously, Wells could have reduced its income by just $1 billion in Year 1.

“They were changing the rules on the fly to the apparent advantage of banks who wanted to get something for nothing out of this crisis,” said Janet Tavakoli, president of Tavakoli Structured Finance in Chicago. “Why aren’t people being questioned and held accountable for that?”

As it turned out, Wells did not benefit from the code change because it had no taxable income to offset, the report said. I.R.S. Notice 2008-83 was repealed in 2009.

END OF EXCERPT

Janet Tavokoli Note: On September 30, 2008, the day after Citi announced a merger with Wachovia valued at $1 per share, the Rule was publicly announced. The Treasury Department—not Congress as required by the Constitution—had changed the Rule. Thursday of that week, Wells Fargo announced a $7 per share offer for Wachovia. The general thinking was the tax rules were changed to give Wells Fargo the ability to take larger immediate tax write-offs.

This is from P. 370 of the FCIC report: “IRS Notice 2008-83. This administrative ruling, issued just two days earlier, allowed an acquiring company to write off the losses of an acquired company immediately, rather than spreading them over time. Wells told the SEC that the IRS ruling permitted the bank to reduce taxable income by $3 billion in the first year following the acquisition rather than by $1 billion per year for three years. However, Wells said this “was itself not a major factor” in its decision to bid for Wachovia without direct government assistance.”

Wells claims the tax rule change was not a major factor in its decision. Yet it seemed the sole purpose of Treasury’s machinations was to sweeten the incentive for Wells to engage in the merger. Things didn’t work out as planned for Wells, however. Wachovia’s Golden West acquisition and other issues created mounting losses, and in January 2009, Wells Fargo’s losses seemed to dash hopes for the supposed tax benefit of the merger: http://goo.gl/urXia . The tax Rule changed back in 2009, but in April 2009 FASB changed the accounting rules, a bigger benefit on a net basis to troubled banks.

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago’s Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

18 comments on “Janet Tavakoli and Gretchen Morgenson
  1. MARTIN CASTILLO says:

    MAX, WE’RE ORGANIZING A MASSIVE MARCH ON THE FEDERAL RESERVE AND BANKING CARTELS ON APRIL 15TH. WE WOULD REALLY APPRECIATE A PLUG ON YOUR SHOW TO GET THE MASSES OUT. PLEASE ADVISE. YOU ARE A MEGA CELEBRITY ON MY FACEBOOK PAGE

  2. SaulRosenberg says:

    Untouchables.
    The REAL news is who is going to win the Superbowl? Is Charlie Sheen going to complete rehab? Who is Bristol Palin’s new boyfriend?
    Americans are so stoopid…don’t see or don’t care about these thefts. We’ll get what we deserve (bread? circuses?).

  3. Youri Carma says:

    Piers Corbyns report on December & Januarys weather Jan. 2011 Vid http://www.youtube.com/watch?v=C7JuZKyl2x8

    Listen to this guy who DID actualy predict the weather DEAD ON! Not to the scamsters of the IPCC who predicted mild winters.

  4. buzlightening says:

    Rank world wide chaos comes a knocking! It’s the daisy chain end game popping off as all global fiat currencies race to zero!! Real monetary stores of value win out over paper money historically 99% of the time!! We’re just waiting for this historical fiat cycle to run out as in the USD being off the gold standard since 15 August 1971! Yep! Paper gets torched after a 40 year cycle and the USD no different!! All SANE eco students pouring into genuine stores of value beyond trusting paper money=commodities/honest money gold/silver as we eventually get 100% historical cycles of paper vs commodities losing again; paper fiat devalued to it’s intrinsic value=ZEROooooo!! Kaboom! Collapse! It’s over! The bankster parasites consuming the host and dieing! Consumed by the consumer!! Those wanting to survive with food & real money! 3rd grade math says you can’t print to infinity and then add another concentric circle outside imploding derivatives!! The self evident truth of the all consuming appetite of natural; irrefutable economic laws say we live in a finite world and paper ponzi always ends; ALWAYS!! Why!! Real resources are limited and this is the nature of the world we live in!! Just be smart enough now to get your hands physically on the limited resources as the masses or minions always; that’s ALWAYS! TAKE IT UP THE TAILPIPE!! WHY! TRUSTING GOVERNMENTS TO DO WHAT IS RIGHT AND FEED THE PEOPLE!! THEY NEVER DO; NEVER! USE US ALL FOR CANNON STUFFING’S, SPORT, PROFIT FOR GAIN TO INCREASE GLOBALIZATION CENTRAL POWER; TO SLAVORADE THE MASSES!!!! Classic standard procedure for the haves over the have nots to rule over them!! Real freedom comes in not being subject to the governments centralizing of power and the only way to do that is self sufficiency; which of course is true freedom!! Get enough stores of genuine monetary stores of value set aside through prudent living and you won’t be subject to kings, magistrates, rulers or presidents in our case!! Hey! If that truth don’t set you free, then our founding fathers who prescribed to less government to ease the burdens of, “we the people,” was fought in vanity!! True freemen are not beggars as it goes contrary to the nature of happiness!! Pursue happiness freely! Still our choice through prudent living other than today’s free lunch crowd succumbing to vice/dependency! Bad habits leading to self destruction; the destroyer! Virtue exalts; edifies in further happiness by freedom to know correct principle and allowing one to govern their own lives!! Government wouldn’t dare let out this secret or they’d be out of business! World wide people actually learning to govern their own lives through correct and sound principle!! Imagine that! Imagine a King who would allow such!! Well! I don’t know the future but know who holds the future and the real true King is coming to reign as governments/nations implode naturally through corrupt living; not knowing sound or correct principle to free the people!! When you’re green you grow and when you’re ripe you rot!! We as a U.S. people rotting from the inside out and the end comes swiftly!! Perhaps this time around the bankster fraudsters/lying politicians will be swept away and leave a people more prepared for true freedom!! You know where we get correct principle from sound leading men of integrity and sterling character; who teach us to govern our own lives!! How sweet this will be!!

  5. Youri Carma says:

    Godamn people died of this global warming bull shit cause Autralia stopped building dams cause the IPCC said it’s gonna be dry!!! FUCK THEM!

    And stop endosring this IPCC Bull shit!!!

  6. 8Ball says:

    Bet anyone here that I get my “Crash JPM, buy Silver” stamp before I ever see any Silver Keisers….

  7. ronron says:

    these guys are full of shit. the economy of egypt was in free US dollars. the dollar is worth nothing in the middle east. http://www.youtube.com/watch?v=kU9Xn2Oxa0c

  8. 8Ball says:

    Youri, Best solution is to let people figure things out for themselves…

    People were given brains for a reason, and if left to their own, they will figure out the best way to deal with whatever situation they happen to be experiencing.

    Add an all knowing, nanny state, government to the mix, full of corrupt pols and beauraucrats, and you inevitably get FUBAR to the maximum…

  9. MirrorMirror says:

    Evenin’ All … it’s all happening it seems.

    Damn , I was hoping to be able to buy more G&S cheaper
    Where’s the Bernank when you need him
    ;-(

  10. ronron says:

    hi MM.

  11. MirrorMirror says:

    hi RR

    @ALL

    I’ll ask again … who recommended the book FLICKER here ?
    TIA

  12. MirrorMirror says:

    FLICKER
    … On the surface it’s an insane account, one that reaches back to the twelfth century ‘invention’ of the movies and predicts Armageddon in the wake of PlayStations and iMacs. It tests the suspension of disbelief when introducing a few real Hollywood luminaries to the brew, but Flicker is a powerfully seductive tale, an eccentric tour de force by Theodore Roszak. Jam-packed with film references, it seduces through a bizarre conspiracy plot committed with diabolical patience….

    http://home.comcast.net/~flickhead/Flicker.html

    Am still reading @P200 … gets more interesting from page to page
    FWIW

  13. Mary Pepper says:

    Great article – keep it up. Hey, Martin Catillo, let me know about your march. I’m in nor cal but can be there.