We had mentioned in Links a few weeks ago tax law change allowing banks acquiring other banks with crappy assets to use the tax losses (the net operating loss carryforward) of the acquired company:
Major Tax Incentive For Bank Purchases: IRS Eliminates the Limitation on Banks’ Built-In Losses Post-Purchase Jones Day (hat tip reader Richard). Estimates cost of this little change at $140 billion. Oh, and Treasury doesn’t have the authority to change the tax code, not that that is stopping them.
We had thought about getting exercised about it at the time, but we figured this one was a lost cause.
We may have gotten that one wrong. Senator Chuck Grassley, ranking Republican on the Senate Finance Committee, is taking a very keen interest in the NOL issue and the possibility of preferential dealings between certain ex-Goldman employees at Treasury and financial firms. The first beneficiary of the new NOL rules? Wells Fargo, which made a Citi-trumping bid for Wachovia thanks to this rule. And who headed Wachovia? Robert Steel, ex-Treasury, ex-Goldman employee.
We’ve pointed to some signs that Congress might be belatedly developing some backbone. Readers have been largely skeptical and dismissive. But here we have a senior Republican asking about “Government Sachs.” A bit late, cynics might say. Let us not forget that the big bailouts are a second-half-of-2008 development.
From the Financial Times:
A senior Republican senator is seeking an investigation into potential conflicts of interest among former Goldman Sachs executives serving at the US Treasury and whether any officials exceeded their authority by implementing a controversial tax change without the approval of Congress.
Chuck Grassley, the most senior Republican on the Senate finance committee, asked Eric Thorson, inspector-general of the Treasury, to investigate the “independence” of several Treasury officials who formerly worked at Goldman Sachs and serve as advisers to Treasury secretary Hank Paulson, the former chief executive of the Wall Street bank.
Mr Grassley said in a letter to Mr Thorson that there was reason to be concerned that “relationships” between the officials and board members at two merging banks, Wells Fargo and Wachovia, gave the “appearance of preferential treatment”.
Mr Grassley singled out Robert Steel, a former Goldman official who worked under Mr Paulson at the Treasury before he became chief executive of Wachovia.
Mr Grassley is specifically concerned with a change in the tax code the Treasury initiated in late September that saved some institutions tens of billions of dollars and paved the way for Wells Fargo’s acquisition of Wachovia…
The September 30 “notice” by the tax authorities, which fall under Treasury’s jurisdiction, altered a section of the tax code that had previously prevented tax-motivated acquisitions of loss-making corporations. In effect, the notice eradicated a limit on the amount of taxable income an acquiring bank could deduct after a takeover.
It has been estimated that the change could save Wells Fargo nearly $20bn (€15.9bn, £13.6bn).
Mr Grassley, who has a reputation for aggressively uncovering and pursuing tax evasion, has a previous working relationship with Mr Thorson, who served as chief investigator for the Senate finance committee and whom Mr Grassley once praised for having “integrity and courage”.
Last week, Mr Paulson defended the code change and said it had been done through an “administrative process” that was “quite legal”. The Treasury secretary said that the previous tax policy was “impractical and unworkable” in the current economic environment.
Paulson’s hubris is breathtaking. The IRS (and by extension, the Treasury) administers the tax code. It does not write it. And trying to claim changing the tax code is within Treasury’s authority is a remarkable bit of executive overreach.
Sadly, this Financial Times story has gotten perilously little coverage in the US.