Front page article in the Washington Post today, calling attention to a highly questionable aspect of the $750 billion bailout plan: A Quiet Windfall For U.S. Banks.

We learn from WaPo that the Treasury Department slipped through a $140 billion tax windfall to US banks — in theory repealing 1986 legislation, passed by Congress and signed by President Reagan.

The likely illegal change was aggressively lobbied for by banking officials, who sought to take advantage of the market turmoil and credit crisis.This is an ongoing issue we have witnessed in every prior bailout: Opportunism knows no sense of decency.

WaPo:

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.

“Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no,” said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. “They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks.”

This should come as no surprise to long-time watchers of the Bush White House. From their extra-legal signing statements (they took them seriously, but legal scholars said they had no legal standing) to the abuses at the Justice Department, there was very little respect ever paid to the US Constitution.

How typical of the rogue elements within the outgoing administration.

Look for litigation about this shortly . . .

>

Source:
A Quiet Windfall For U.S. Banks
With Attention on Bailout Debate, Treasury Made Change to Tax Policy
Amit R. Paley
Washington Post, November 10, 2008; Page A01

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/09/AR2008110902155.html

Category: Bailouts, Credit, Finance, Legal, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

34 Responses to “WAPO: Treasury Illegally Repeals Tax Law”

  1. Archiphage says:

    This also comes as no surprise to anyone who knows the nature of all states in all times and places. The disregard for its own rules is by no means a unique feature of this particular band of violent criminals who claim ownership over my life and yours. Do you really expect anything different from the incoming group of miscreants? I predict that anyone who does is in for a large measure of disappointment.

    ~~~

    BR: While your statement may be true as a generality, this outgoing group of American leaders has been extremely, unusually, and deeply disrespectful of the rule of law: Think Habeus Corpus, Geneva conventions, signing statements, etc.

  2. wisedup says:

    The next question is do we have enough people with sufficient morals to be able to run this economy?
    We may have a new president but Wall Street still seems infested with the people who drove us into this mess.

  3. peachin says:

    Obviously this will be a wonderful test of the Tax System. Business as usual cannot be tolerated – or we are going nowhere in the future. There is no question, Lobbying (payola) has to be curtailed by special interests – either by law or outrage. Congressional ignorance, payola, against the tide loyalty – all has to be eliminated. Conservatism in an absolute survival change are the “brakes” applied to an economic machine
    that has to accelerate. The next subject that has to be dealt with – absolutely is “Pork” – a mantra of “Expose, Isolate and Shoot the Pig” has to prevail. And, Finally, Surgery has to replace stimulants as a no look back solution.

  4. Archiphage says:

    BR: Time will tell whether the rule of law will fare any better under our new Guardians of Freedom and Bringers of Goodness and Light. I am not getting my hopes up, especially not as long as ‘law’ is whatever 9 black-robed bozos, 535 nattering nincompoops, or one Blessed Savior says it is.

    wisedup: I think I need to first see justification for an affirmative answer to this question:
    Is this economy something that can and should be ‘run’ by anyone?

  5. jmborchers says:

    Circuit City just went BK.

  6. Carlomagno says:

    According to the WAPO article “According to tax attorneys, no one would have legal standing to file a lawsuit challenging the Treasury notice, so only Congress or Treasury could reverse it.”

    So if true, no litigation BR.

  7. jmborchers says:

    Stock market crash is coming. The signs are here. We have many stocks ludicristly up and just as many down. When the market gets this undecided on what to do things quickly turn to panic generally.

  8. deanscamaro says:

    How did we breed that many crooks in the generation presently running our government? There must be something to this global warming that is effecting their brains (if they had any).

  9. Stuart says:

    More and more the Constitution is becoming little more than a door mat. The Public deserves that with which it allows to take place under its nose. Apathy deserves and invites corruption.

  10. wisedup says:

    for Archiphage;
    ah, I should have been more careful in my word choice
    my intention was to highlight the basic components of the economic system such as trading desks, clearing houses, rating agencies etc. not the “nominal leaders”.

  11. Mannwich says:

    This kind of behavior has been par for the course for this administration during its entire 8-year history – take advantage of a crisis to push through special goodies for its cronies under the radar. Not a surprise, unfortunately.

    @jmborchers: I fear you may be right. This sucker’s going to down, maybe not today, or even this week, but it’s going down big at some point. I fear there are definitely many more big “surprises” in the offing re: the credit meltdown and combine that with the overall deteriorating economic climate, and we have the makings of at least another big leg or two down.

  12. Archiphage says:

    For wisedup;
    In that case, I think the answer is ‘No’, and will remain so until there is no longer a little larceny in the heart of every man. People respond to (admittedly imperfectly) perceived incentives. I don’t see that changing anytime soon.

  13. jmborchers says:

    Ford and GM credit is done. The banks will lock up any cash they have left. Just like when LEH failed. It will cause the crash.

  14. rww says:

    The new administration will be able to undo this with an executive order, no?

  15. jmborchers says:

    I believe the big fall in the markets last week was because someones assets were locked by a bank, just like with LEH. It’s either AIG, F or GM or maybe all.

    Market’s don’t go down 8% in 2 days for no reason.

  16. dead hobo says:

    Our crooks are best of breed. We’re number one and no damn Democrats will do much to stop that.

    We perfected ‘borrow and spend’ and even Obama is embracing that, only with a more middle class emphasis. We invented ‘Supply Side Economics’ where you can lower receipts and increase revenues, and lots of people with credentials will swear on a stack of bibles it’s true! One half of the population embraces stupidity and will believe almost anything they are told if it’s presented in the right way. Our crooks can lose trillions on bad derivative bets, and Uncle Sam will cover the bet. Our investment banks operate as executive level bookies and they get cash from Uncle Sam when the house loses.

    The Republicans aren’t stupid. Not even a little. They are exceptional thieves who pretend to be stupid in order to allow theft on a massive scale. They call it the ‘freeing the market place from excessive regulation.’ Others would call it removing the fence around the hen house and letting the biggest thieves take whatever they can get. The first in were probably the first out and are massively wealthy as a result. The chumps got left holding the bag and the government is reimbursing them.

    Don’t kid yourself. Organized crime has left the neighborhoods to an underclass of thieves. The big money is in crimes of massive proportion that, mysteriously, aren’t even illegal of approached in the right way. I have no doubt new scams are being concocted at this very moment. Democrats will allow them to occur if they are packages as ‘social equity’.

  17. Winston Munn says:

    The Titanic is sinking, and the lifeboats are being used to save the rats.

    If the reprsentatives of We the People do not wish to get their hands dirty and stop the looting of the Treasury by these thieves, there is always the French Solution.

    “The people have no bread and no credit – Then let them eat cake.” – Hank Antoinette

  18. jlj says:

    The new administration/congress needs to make all the tax losses retroactive for five years as regards the calculation of all bonuses. Then scrape back the bonuses paid to all the “Masters of the UnderVerse”. If the firms did not really make any profits the last 5 years then they should all have to forfeit the bonuses paid. They can even apply to the IRS and NY State etc. for refunds on the taxes paid on the bonuses they recieved. Of course they might have to sell everything to pay off some/most/all of the money they owe – but they were “Subprime Bonuses” anyway. The total amount of bonus money to be paid back might well be greater than the $700 Billion Bailout to begin with – an even better way to recapitalize the banks!

  19. CB says:

    The change in tax law may create a perception of stronger banks buying up weaker banks (even due to rather extreme tax incentives) and is probably less destabilizing than constant outright bank failures. Clever or desperate?

  20. sellthekids says:

    OK, after reading the article and doing a little Googling, i now have questions, which i am hoping the vast resources here can answer.

    what helped me most understand Section 382 was this ppt presentation from Timothy Thompson @ Kellogg School of Management: http://www.kellogg.northwestern.edu/faculty/thompsnt/htm/d48/ftp/nol_stuff.ppt

    from WaPo:
    “Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company’s losses to offset their gains and avoid paying taxes.”

    “The opposition to Section 382 is part of a broader ideological battle over how the tax code deals with a company’s losses. Some conservative economists argue that not only should a firm be able to use losses to offset gains, but that in a year when a company only loses money, it should be entitled to a cash refund from the government. ”

    obviously, if U.S. businesses were creating shell companies and using them to dodge taxes, then 382s suck. bravo for reining them in. by extension, repealing them again will allow companies to use the offshore tax dodge route anew. great thanks, Paulson.

    but in this case, it doesn’t appear Paulson was trying to allow banks to offshore their losses; rather, it appears he knew the state of the banking industry ( http://ml-implode.com/index.html ) and was trying to facilitate big banks purchasing smaller banks that are ailing.

    do i have that right?

    now we can argue that, as usual, government brought a hammer to a job that required a screwdriver (and when one has a hammer, everything you see is a nail) and thus created more problems than they solved, e.g. the Pandora’s Box that TARP opened where big banks are buying up healthy, small banks. nice action!

    imo, we all knew that things were going to be shady when Paulson et al showed up for Allowance Day and had a four page letter explaining where they were going to be spending our money. also, we all recognized that the Senate, who know how to play the legislative game far better than their brethren in the House, would tack on some serious ($$$) amendments when the House voted down the bailout. well played, Senate, well played.

    so, going back to July of 2007, we see that Paulson was already planning these changes and was angling on how to do it ( http://www.ustreas.gov/press/releases/hp496.htm ). cue up financial meltdown of epic proportions and he now has his vehicle.

    so, i guess i am asking: is the repeal of Section 382 as bad as WaPo makes it out to be?

    i am not questioning the way it was done or the previous uses of it: i agree that our government has for a long time been run by business crooks who are smart enough to know that if you are going to rob something, you don’t rob a corner store…you go where there is a lot of money. oh, hai Washington D.C. didn’t see you there!

    any tax gurus out there? what are the forward-looking implications of Section 382′s demise?

    as always, thanks for the knowledge transfer!

  21. Pool Shark says:

    It’s a darn good thing Obama opposed this illegal bailout package….

    What’s that?… He supported it?…

    Oh,…

    Nevermind.

  22. Pat G. says:

    Hey, we all know that we have the best crooks money can buy! The whole world knows that.

  23. Bruce N Tennessee says:

    Well, even though there wasn’t much “real” news this morning, there was real news:

    An analyst finally has the guts to say the price of GM is going to 0. I know everyone noted that..

    Roubini, still the only man who has read this overwhelmingly right, says we have 20-25% more to go on the downside in stocks in 2009…I know everyone noted that too….

    The AIG mess just gets worse and worse as Barry posted…

    A bailout of the car companies will not make them more competitive, therefore the end result will be AIG-like…as I posted earlier, the Asian car companies are now building in the US and beating us (Detroit) with American workers and workplace rules…

    There seems to be an increasing number of people whose basic message is: Liquidity is not a cure for insolvency…I see this everywhere today.

    Therefore, will stick to my short term callable cd’s for now….with the thought that inflation COULD be a factor, although not in the near future….but I wouldn’t rule it out…

    My wife and I had a great weekend, went back to my hometown and danced in the same place we danced after a football game years ago, our first date, and with the same band…! Got to see all my old buds…amazing how much everyone but me had gotten on in years…

  24. 10 cc says:

    As Naomi Klein (for one) has noted, perhaps it is time to stop talking about the big bailout in terms of a partial nationalization of banks by the Treasury since it seems to more closely resemble a partial privitization of the Treasury by Wall Street.

    More from Klein…

    “It didn’t have to be this way. Five days before Paulson struck his deal with the banks, British Prime Minister Gordon Brown negotiated a similar bailout — only he extracted meaningful guarantees for taxpayers: voting rights at the banks, seats on their boards, 12 percent in annual dividend payments to the government, a suspension of dividend payments to shareholders, restrictions on executive bonuses, and a legal requirement that the banks lend money to homeowners and small businesses.

    In sharp contrast, this is what U.S. taxpayers received: no controlling interest, no voting rights, no seats on the bank boards and just five percent in dividend payouts to the government, while shareholders continue to collect billions in dividends every quarter. What’s more, golden parachutes and bonuses already promised by the banks will still be paid out to executives — all before taxpayers are paid back.”

  25. Winston Munn says:

    In a related question, why would Bloomberg need to file a Freedom of Information Act-based lawsuit to find out what collateral the Federal Reserve is accepting for the $1.5 Trillion in loans they have made so far that are backed by the taxpayers? Could there be something there to hide?

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKr.oY2YKc2g

  26. dogjawbull says:

    Naomi Klein, people. Another Shock opportunity to steal money from the taxpayers. Or in this case from future taxpayers. These people are so frikkin’ dirty! I’d add that Reuben Jeffery III, who is on the board overseeing the free flow of tax bucks from the Treasury, also was the executive director of Paul Bremmer’s Provisional Coalition Authority in Iraq….you know, the guy that gave out billions in cash, and tens of billions in contracts for which there is no accounting? Right. That Reuben Jeffery III. This is the most corrupt government we have ever had the pleasure of getting ass f*cked by.

    Scott in Chicago

  27. batmando says:

    Wholesale looting by the ancien regime

  28. danvta says:

    This loophole was the only reason Wells made its bid on Wachovia. I wonder how this affects Citi’s specific performance case against Wachovia? I’ve heard the argument that the Wells deal is better for taxpayers than the Citi deal because the FDIC wouldn’t guarantee any of the Wachovia debt, but if Wells’ bid is predicated on paying $25 billion less in taxes, it seems like taxpayers are still on the hook. I think Citi got screwed…

  29. Patrick Neid says:

    from the article:

    “Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company’s losses to offset their gains and avoid paying taxes.”

    and

    “The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.

    The Jones Day law firm said the tax change, which some analysts soon dubbed “the Wells Fargo Ruling,” could be worth about $25 billion for Wells Fargo. Wells Fargo declined to comment for this article.

    The tax world, meanwhile, was rushing to figure out the full impact of the notice and who was responsible for the change.

    Jones Day released a widely circulated commentary that concluded that the change could cost taxpayers about $140 billion. Robert L. Willens, a prominent corporate tax expert in New York City, said the price is more likely to be $105 billion to $110 billion.

    Over the next month, two more bank mergers took place with the benefit of the new tax guidance. PNC, which took over National City, saved about $5.1 billion from the modification, about the total amount that it spent to acquire the bank, Willens said. Banco Santander, which took over Sovereign Bancorp, netted an extra $2 billion because of the change, he said. A spokesman for PNC said Willens’s estimate was too high but declined to provide an alternate one; Santander declined to comment.”

    and finally

    “Grassley and Sen. Charles E. Schumer (D-N.Y.) have publicly expressed concerns about the notice but have so far avoided saying that it is illegal. “Congress wants to help,” Grassley said. “We also have a responsibility to make sure power isn’t abused and that the sensibilities of Main Street aren’t left in the dust as Treasury works to inject remedies into the financial system.”

    In the end, windfall or not, this is another wink and nod controversy. If you want the strong to take over the weak and make progress cleaning up this mess, end arounds like this are only beginning. But all together now, I’m shocked!

  30. Pat G. says:

    Thanks for that link Winston. I had heard something about that earlier today on news radio. It is simply unbelievable. Then again, no it’s not.

  31. Jekyll Island says:

    Will be interesting to see how a Federal Judge deals with Bloomberg’s FOIA request since FOIA applies to Federal Agencies and the “FED” isn’t one…

  32. Carlomagno says:

    @Jekyll Island: Federal Reserve is overed by FOIA. See http://www.federalreserve.gov/generalinfo/foia/default.cfm.

  33. Carlomagno says:

    BTW, the US DOJ published a guide to FOIA which summarises relevant jurisprudence. The description of the issue that seems most relevant to this case (whether the information is privileged or confidential) can be found starting on p. 13 of this document:

    http://www.usdoj.gov/oip/foia_guide07/exemption4.pdf

  34. [...] something much more serious is at stake here. Here’s Barry on the $140B handed out illegally by the Treasury to banks under the form of tax breaks. Steve Randy Waldman follows suit: But, today [...]