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 I.R.S. Notice 2008-83 was repealed in 2009.
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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).