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.
A backbone is necessary, but not sufficient. It’s time to recap the next nervous evolutionary step and grow some brains.
As long as Congress must obtain information and guidance primarily from a private sector with a penchant for perjury and regulators that sleep with their wards, this will only worsen. Precedent has been set repeatedly by a variety of industries.
You are the check and balance, Congress. Stand and deliver.
“Paulson’s hubris is breathtaking”
I believe that is what got us into this mess. Why would an architect of chaos change? What is its motivation?
Yves fails to understand that there are individuals in the world who are PURE SELFISH EVIL AND EGO. Rice, Cheney, Paulson, etc.
You all forget the history of mankind. These guys are monsters who should be stoned to death.
That’s what you do with monsters- you stone them! Simple solution.
You see, monsters don’t believe in laws, they only know that you believe.
Govt Sachs, what a huge monkiker! Let’s use that until it becomes a familial verb.
Instead of calculating NOL, let’s just “Govt Sachs that.”
Robert Steele also may have violated federal conflict of interest rules by jumping from regulator job at Treasury to leader of Wachovia, a regulated bank. I think the rule is that federal agency employees who regulate an industry are barred for one year from working for that industry in certain jobs, particularly jobs that involve substantive $$$ dealings with the agency. Even an apparent conflict of interest violates the rule. I hope Senator Grassley and Treasury inspector-general Eric Thorson will investigate Robert Steele for possible violation of federal conflict of interest rules.
This is the tip of the iceberg, but this does open the possibility of looking for justice and connecting the dots.
APPEARANCE In the use of agency project funds, officials or employees of State or local units of government and nongovernmental recipient/subrecipients shall avoid any action, which might result in, or create the appearance of: • Using his or her official position for private gain; • Giving preferential treatment to any person; • Losing complete independence or impartiality; • Making an official decision outside official channels; or • Affecting adversely the confidence of the public in the integrity of the Government or the program. For example, where a recipient of Federal funds makes subawards under any competitive process and an actual conflict or an appearance of a conflict of interest exists, the person for whom the actual or apparent conflict of interest exists should recuse himself or herself not only fromreviewing the application for which the conflict exists, but also from the evaluation of all competing applications.
A few random related ideas; Federal Acquisition Regulation (FAR) generally prohibits a contracting officer from awarding a contract to a Government employee “or to a business concern or other organization owned or substantially owned or controlled by
one or more Government employees.” C.F.R. § 3.601.
Although this is not an ethics rule under OGE’s purview, it is clear that the FAR provision is intended to avoid any employee “conflict of interest” as well as “the appearance of favoritism or preferential treatment by the Government toward its employee.” Id. The exception to this rule applies “only if there is a most compelling reason to do so, such as when the government’s needs cannot reasonably be otherwise met.” 48 C.F.R. § 3.602.
In addition, 18 U.S.C. § 208 prohibits a Government employee from taking official actions on particular matters affecting the financial interests of any person or organization with whom the employee is negotiating or has any arrangement for prospective employment. Thus, section 208 might require you to recuse yourself from participating in any Government matter involving a contractor for your agency with which your LLC is negotiating a business relationship.
Paulson’s hubris is breathtaking.
No less so than the sycophancy (is that a word?) Congress has in recent years showed for e.g. the Fed chairmen. Take a look at some of the testimony of Greenspan and then Bernanke before the shit hit the fan — it’s enough to turn your stomach. So they asked for it — Congress asked to be treated with contempt.
In the current climate I can’t see Congress making a big deal about this; after all, they practically gave Paulson a blank check just a few weeks ago. But good luck to Grassley.
Congress by vote could repeal the clause that bars the head of the Treasury from prosecution as easily as voting to revoke the Federal Reserve’s right to exist.
Santa in making a listand checking twice, let make that ten times ok.
Mabe we can improve the comoditys, with coal shippments to Santa. He’s going to need alot, filling up stockings this year.
Ahhh, I should have waited on that last post… as it was too general and shotgun scattered; sorry!
In battles of conflicts of interest, there is great leeway to allow discretion and thus to allow for abusive and capricious hubris. In this Treasury case, it was amazing that Paulson was somehow involved in changing tax code, because:
Treasury Order 150-10 states in relevant part: "The Commissioner of Internal Revenue shall be responsible for the administration and enforcement of the Internal Revenue laws.
However: Douglas H. Shulman is the Commissioner of Internal Revenue. His nomination was confirmed by the full U.S. Senate on March 14, 2008 and he was sworn in on March 24, 2008.] He formerly served as vice chairman of the Financial Industry Regulatory Authority (FINRA) (successor to NASD) and sat on the board at the Depository Trust & Clearing Corporation (DTCC).
Furthermore, As you recall: DTCC's depository provides custody and asset servicing for 3.5 million securities issues from the United States and 110 other countries and territories, valued at $40 trillion. Last year, DTCC settled more than $1.86 quadrillion in securities transactions.
Thus, I guess this Senator Chuck Grassley thing does go back to this letter in October from Schumer, but at this point, I'm over my limit…. but it does look like these buffoons are all just making up shit as they go along, which may be in some way related to the lack of confidence in America and around the globe!
In a letter sent today to Treasury Secretary Hank Paulson and IRS Commissioner Shulman, Schumer questioned the need for the tax change after the implementation of the Treasury’s capital injection program and expressed concern that the change will result in tens of billions of lost tax dollars for the federal government, which has already committed $700 billion in resources to many of these same financial institutions under the rescue plan approved by Congress last month. Schumer also questions whether the tax change creates an unnecessary incentive for acquisition-minded banks to pursue takeovers that provide no benefit to the stability of the larger financial system, but simply represent an opportunity for firms seeking to future tax deductions to shelter their earnings.
Sorry Yves, this is like a real hair-puller for me!
I agree, they all go to jail. Team Obama to the rescue.
I have to admit I was wrong: I thought I would never again in my lifetime see the level of corruption that occured in the Iraq war profiteering. Oh how wrong I was.
Fannie, Freddie Get Tax Pass, To
Wouldn’t it be nice if the Internal Revenue Service issued a new tax rule that applied just to your company to help it retain all the net-operating losses it could? In that way, the NOLs could be used over the next 20 years to offset income, and reduce the company’s tax bill.
That’s what Treasury Secretary Henry Paulson did for Fannie Mae and Freddie Mac on Monday, when he had the IRS issue Notice 2008-76, which essentially allows the two government-sponsored enterprises to retain all of their NOLs, despite a change of control of ownership, tax expert Robert Willens told CFO.com
Remarks of Douglas Shulman, Commissioner of Internal Revenue, before Independent Sector, Nov. 10, 2008
Just think about it for a minute. The IRS not only collects the approximately $3 trillion it takes to run the federal government but interacts every year with practically every American adult and business. We’re the face of government. And contrary to some opinion, it can be a most welcome face. This year, as of October 24th, we issued 106 million tax refund checks totaling $254 billion.
Let me give you one example. After the collapse of Enron and World Com, Congress passed Sarbanes-Oxley — also known by the shorthand SOX — which fundamentally altered the governance landscape and brought a new, strong, vibrant meaning to the word “fiduciary.” And while legally the law only applied to public companies, I would submit to you that the world of governance for all organizations changed.
>> The lady doth protest too much, methinks.
William Shakespeare, "Hamlet", Act 3 scene 2
What about an investigation into why Lloyd Blankfein was the only investment bank CEO invited to the New York Fed to talk to Paulson the day before AIG was bailed out?
What about an investigation into why Lloyd Blankfein was the only investment bank CEO invited to the New York Fed to talk to Paulson the day before AIG was bailed out?
I seem to recall Yves had a post or two about GS’s exposure to AIG. But maybe I am wrong…
Very interesting post and the comments are very informative as well.
I am always just amazed what the Goldman Sachs alumni get away with and the kit gloves they are treated with. In my view, Rubin advising the incoming administration is a very bad sign.
I think the article on psychopathy you linked to says it all.
Why do I think that Citigroup lobbying is behind the Senator’s actions? Citi needs the FDIC backstop related to the Wachovia takeover and the Wells Fargo takeover undermines that backstop.
As long as presidents are allowed use of ‘signing statements’ to disregard laws passed by congress there will be no utility in having three branches of government. If congress does not oversee, of what use is it?
Congress began undermining their own usefullness when Truman was allowed to fight a war in Korea without approval by congress. Congress has been busily courting lobbyists and ignoring it’s responsibilities for a very long time. Now that the nation faces grave problems congress is ill prepared to step up to the plate.
Since congress was unprepared to take on it’s responsibilities, it once again handed them off to who ever would take them. In the current situation it is Paulson/Bernanke.
All you have to do is is look up the definition of criminal enterprise on the FBI site and you will find many similarities with today’s treasury JMHO ;)
Grassley is just trying to condtion people into thinking he is clean!
Naomi Klein: The Borderline Illegal Deals Behind the $700 Billion Bailout
There’s another piece of this puzzle that is also borderline illegal, which is that in addition to the $700 billion that we are discussing, the $700 billion bailout, there’s another $2 trillion that’s been handed out by the Federal Reserve in emergency loans to financial institutions, to banks, that actually we don’t really know who they’re handing the money out to, because, apparently, it’s a secret.
@ Anonymous – November 18, 2008 2:22 AM
Team Obama to the rescue?!!!!
I think this statement clearly represents why Americans are repeatedly taken for a ride. So close, yet so, so far from the mark.
Will there be legal action? Not when these constituents and their interests OWN every single politician on both sides of the aisle in congress… save for Ron Paul.
I have zero faith in our legal system to do anything about what has become legalized robbery, and subsequently slavery of the American taxpayer.
Dodd can’t even pronounce Mulally’s name properly. Clearly, he’s well-studied on this issue. Fortunately, Mulally’s got his homework covered: just make sure this is structured as a bridge loan that is repeatedly rolled over, because that’ll protect taxpayers.
My apologies in advance for being off-topic but…
Can anyone explain to me why the Treasury and it’s bailout package is trying to foster so much credit when it has been this country’s spending problem in the first place?
It seems to me we need to dial back our consumption to be in line with our income. And the Treasury’s answer is not helping with $700 billion.
Why would this change in the tax code by Paulson and Co. be binding on the next administration? Couldn’t O just change the interpretation back to the old one, the one that was actually written into law by the congress and stick WFC with the right tax bill?
Senator Grassley, Treasury inspector-general Eric Thorson, and federal prosecutors have a rich lode of criminal conflict of interest statutes to investigate in regard to Robert Steel, Hank Paulson, and the Paulson’s Goldman Sachs crew at U.S. Department of Treasury. These criminal conflict of interest statutes are listed at this Office of Government Ethics website.
Taking just one of these statutes, Post-Employment Restrictions 18 U.S.C. 207, in regard to Mr. Steel it would appear there may be as many as six post employment prohibitions to which he is subject. According the another federal website, the highest level federal employees who terminate from Federal service will be subject to all six post employment prohibitions — 18 U.S.C. 207(a)(1), (a)(2), (b), (c), (d) and (f), which make for interesting reading at:
It’s a hint of backbone sufficient to make this progressive consider voting Republican. I’m sure the Republicans will continue to broaden and deepen this new niche by raising fusses over these bailout dilemmas.
Last time I checked, Congress write the Tax Code, not the Treasury. So, yes, Paulson has overreached very far away from his turf here.
“Sadly, this Financial Times story has gotten perilously little coverage in the US.”
Come now, Yves! I’m sure you meant “As expected, this Financial Times…”
Since when is it legit for the US financial media to challenge the spin orthodoxy of the powers that be huh? As a sample, just look at this video on CNBC:
where a guest had the audacity to mention the existence of the President Working Group (a.k.a. Plunge Protection Team) The scene is rather amusing and illustrates pretty well the level of self-censorship in the US media.