In light of Wells Fargo's first quarter "profit" report which was nothing more than the result of a massive accelerated tax deduction of Wachovia's losses, I decided to do some digging to find out what exactly the Treasury and Congress have been up to. As it turns out, they have been up to a lot in terms of rewriting the tax code, for the benefit of Wall St. of course.
According to an October 18th article in the Wall Street Journal, since September 30th, there have been three modifications of the tax code that have allowed banks and major financial institutions to receive a windfall of tax deductions and preferred tax treatment.
The most dubious of the three IRS tax changes took place on September 30th of 2008, just days before Wells Fargo outbid Citigroup for the rights to purchase Wachovia. The WSJ describes the tax code change as, "Under the old rules, Wells Fargo would have been limited to annual tax deductions stemming from the Wachovia losses of roughly $930 million over the next 20 years, or a total of $18.6 billion, estimates Mr. Willens. Wells Fargo will now be able to use all $74 billion in losses. That will likely mean additional tax savings to Wells Fargo of about $19.4 billion -- or more than the total purchase price for Wachovia's common stock, currently about $14.3 billion."
In other words, the argument can be made that the only reason that Wells Fargo purchased Wachovia, and the only reason Well Fargo was profitable in the 1st quarter, was because of this massive accelerated tax deduction.
Sen. Charles Grassley, the ranking Republican on the Senate Finance Committee, has said about Treasury's actions, "Congress should have been informed and consulted before Treasury took such an extraordinary action that likely will add billions of dollars to the deficit,"
Additionally, effective October 3rd, companies are now allowed "to bring back cash from overseas for months at a time without incurring typical 35% corporate income tax."
And finally, they allowed "community banks that lost money on preferred stock in Fannie Mae and Freddie Mac to take ordinary losses, rather than less-useful capital losses."
The irony of this whole fiasco is that I have been advocating for over a year for this type of accelerated depreciation when it comes to investment real estate passive losses so that we could stimulate new demand for real estate and stop the decline in home values and bring stability to the housing market. Unfortunately, it appears that Main St. has once again taken a back seat to Wall St.
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