VIDEO: Obama and His Economic Plan are Confused
Note from Allison: This is Joseph Stiglitz. He’s the most cited economist in the world, a Nobel Laureate, and the guy who first price-tagged the Iraq war at $3 trillion. As you’ve probably already gathered, he’s a genius. Also, he’s smart, which is different than genius because it means he possesses the gift of “breakin’ it down,” and speaking simply so we mortals can understand him.
He very clearly explains why Obama has devised a plan to help the banks, and not the bankers, and he also details what we need to do in order to change our financial system. Well worth the watching.
Watch the videos here.
VIDEO: Bernie Sanders to the Rescue
ZP Heller, Brave New Foundation (h/t Alternet)
President Obama delivered a fantastic speech Tuesday night. It’s tone alone will go a long way toward reassuring a nation mired in economic crisis.
And amazingly, there were many moments of bipartisan applause, like when Obama tackled corporate greed: “I intend to hold these banks fully accountable for the assistance they receive, and this time, they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer. This time, CEOs won’t be able to use taxpayer money to pad their paychecks or buy fancy drapes or disappear on a private jet. Those days are over.”
This was music to my ears, but as Robert Scheer astutely pointed out at The Nation, the problem Obama had in discussing regulation to fix our financial woes is that many of his top economic advisors, including Lawrence Summers, were responsible for gutting the regulatory system that helped cause this mess in the first place.
Don’t get me wrong, Obama’s speech was strong, and hopefully it will symbolize a fundamental change in thinking from his economic team. But I’m just glad we have someone like Sen. Bernie Sanders, I-Vt., to help Obama make good on his demagoguery.
The independent senator from Vermont says we need a new Wall Street. He wants to confront the culture of greed head on, get rid of the CEOs of these corrupt financial institutions and establish a much stricter regulatory process.
Sanders has been a vocal critic of TARP spending from the beginning, and last month he called for the congressional TARP Oversight Panelto expand its focus and dig into the causes of the financial crisis, using subpoena power to expose the roots.
Sanders’ vigilance and frankness, coupled with Obama’s rhetoric Tuesday night, gives me hope.
ZP Heller is the editorial director of Brave New Films. He has written for The American Prospect, AlterNet, The Philadelphia Inquirer, and The Huffington Post, covering everything from politics to pop culture.
U.S. Is Said to Agree to Raise Stake in Citigroup
The Treasury Department reached a deal late Thursday to take a stake of 30 to 40 percent in Citigroup as part of a third bailout of the embattled bank, according to several people close to the deal.
Vikram S. Pandit, the chief executive, will remain at the helm, but Citigroup will have to shake up its board so that it has a majority of independent directors, a move that federal regulators had already been pursuing.
Under the terms of the deal, the Treasury Department has agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock.
It will convert its stake to the extent that Citigroup can persuade private investors, including several big foreign government investment funds, to do so alongside the government, two people close to the deal said.
The Treasury Department will match the private investors’ conversions dollar-for-dollar. That accounts for uncertainty in how big the government’s stake will be.
Citigroup and Treasury officials reached an agreement late Thursday night, but final details were still being worked out. The deal is expected to be announced Friday.
A Treasury spokeswoman did not return a phone call seeking comment. A Citigroup spokesman declined to comment.
The Obama administration deliberately stopped short of securing a majority or controlling interest in Citigroup, but will probably come under intense pressure to take a much larger role in shaping the bank’s direction. Taxpayers, after pumping more than $45 billion into the bank, have become Citigroup’s single largest shareholder. The government will not put in any additional money for now, but some analysts believe Citigroup may require more down the road.
The move is one of the most drastic steps federal officials have taken to prevent the collapse of an institution deemed “too big too fail,” as its downfall could send shockwaves through the global markets. The government also took a major ownership stake in the American International Group, and seized control of Fannie Mae and Freddie Mac in September. So far, none of those deals have turned out well.
The Obama administration has tried to keep the banks in private hands and tried to stamp out talk of nationalization. But Citigroup’s plunging share price and its deteriorating financial condition made it almost inevitable the government would have to convert its stake.
The deal is expected to serve as a model for other financial institutions. Other major banks could find themselves in a similar position in the coming weeks if a new “stress test” that examines their ability to cope with rising losses shows they do not have sufficient capital, or the right amount of common stock, to appease regulators. Administration officials say they will convert the government’s existing preferred stock investments into common shares and, if necessary, make additional investments to stabilize the banks.
The Citigroup deal tries to address a potential shortfall of common stock, which investors and regulators now demand. Details remain murky, but the government has agreed to convert its investment at a price of as much as $5 a share, more than twice the value of Citigroup’s $2.46 closing share price on Thursday. That means the government’s stake could rise to as much as 40 percent, from 8 percent, giving taxpayers more risk, but more potential for profit if the company recovers.
Still it will severely dilute Citigroup’s existing shareholders. Those shareholders include longtime investors like Saudi Prince Walid bin Talal and Sanford I. Weill, its former chairman, and many large asset management and pension funds that manage money for ordinary investors.
Citigroup has been pursuing a similar conversion plan with several big preferred stock investors, including several government investment funds like the Abu Dhabi Investment Authority and the Kuwait Investment Authority, as part of a broader financial restructuring.
By retiring the debt and issuing new shares of common stock, Citigroup can bolster it common equity position. So far, no preferred shareholders have agreed to swap their shares. And without the government alongside them, it is an even tougher sell because of fear their positions might be wiped out.
Citigroup officials hope the government’s additional support bolsters confidence and helps revive the company’s sunken stock price. The deal also frees up some several billion a year in additional capital because it no longer has to pay out the dividend to preferred stockholders.
But it does little to address the bank’s underlying problem: Citigroup may not have the earnings power to weather the tsunami of consumer losses expected over the next several quarters. That is because tens of billions of toxic mortgage-related assets remain stuck on its balance sheet. Until they are removed, few private investors will be willing to pour new capital into the bank.
Banking on the Brink
Comrade Greenspan wants us to seize the economy’s commanding heights.
O.K., not exactly. What Alan Greenspan, the former Federal Reserve chairman — and a staunch defender of free markets — actually said was, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” I agree.
The case for nationalization rests on three observations.
First, some major banks are dangerously close to the edge — in fact, they would have failed already if investors didn’t expect the government to rescue them if necessary.
Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can’t risk letting much bigger institutions like Citigroup or Bank of America implode.
Third, while banks must be rescued, the U.S. government can’t afford, fiscally or politically, to bestow huge gifts on bank shareholders.
Let’s be concrete here. There’s a reasonable chance — not a certainty — that Citi and BofA, together, will lose hundreds of billions over the next few years. And their capital, the excess of their assets over their liabilities, isn’t remotely large enough to cover those potential losses.
Arguably, the only reason they haven’t already failed is that the government is acting as a backstop, implicitly guaranteeing their obligations. But they’re zombie banks, unable to supply the credit the economy needs.
To end their zombiehood the banks need more capital. But they can’t raise more capital from private investors. So the government has to supply the necessary funds.
But here’s the thing: the funds needed to bring these banks fully back to life would greatly exceed what they’re currently worth. Citi and BofA have a combined market value of less than $30 billion, and even that value is mainly if not entirely based on the hope that stockholders will get a piece of a government handout. And if it’s basically putting up all the money, the government should get ownership in return.
Still, isn’t nationalization un-American? No, it’s as American as apple pie.
Lately the Federal Deposit Insurance Corporation has been seizing banks it deems insolvent at the rate of about two a week. When the F.D.I.C. seizes a bank, it takes over the bank’s bad assets, pays off some of its debt, and resells the cleaned-up institution to private investors. And that’s exactly what advocates of temporary nationalization want to see happen, not just to the small banks the F.D.I.C. has been seizing, but to major banks that are similarly insolvent.
The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.
For example, the administration initially floated the idea of offering banks guarantees against losses on troubled assets. This would have been a great deal for bank stockholders, not so much for the rest of us: heads they win, tails taxpayers lose.
Now the administration is talking about a “public-private partnership” to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose.
Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis.
How would nationalization take place? All the administration has to do is take its own planned “stress test” for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary. Yes, the whole thing would have a Claude Rains feel to it, as a government that has been propping up banks for months declares itself shocked, shocked at the miserable state of their balance sheets. But that’s O.K.
And once again, long-term government ownership isn’t the goal: like the small banks seized by the F.D.I.C. every week, major banks would be returned to private control as soon as possible. The finance blog Calculated Risk suggests that instead of calling the process nationalization, we should call it “preprivatization.”
The Obama administration, says Robert Gibbs, the White House spokesman, believes “that a privately held banking system is the correct way to go.” So do we all. But what we have now isn’t private enterprise, it’s lemon socialism: banks get the upside but taxpayers bear the risks. And it’s perpetuating zombie banks, blocking economic recovery.
What we want is a system in which banks own the downs as well as the ups. And the road to that system runs through nationalization.
UBS: Sorry About All The Fraud
In the hush-hush world of Swiss banking, the unthinkable is happening: secrets are spilling into the open.
UBS, the largest bank in Switzerland, agreed on Wednesday to divulge the names of well-heeled Americans whom the authorities suspect of using offshore accounts at the bank to evade taxes. The bank admitted conspiring to defraud the Internal Revenue Service and agreed to pay $780 million to settle a sweeping federal investigation into its activities.
It is unclear how many of its clients’ names UBS will divulge. Federal prosecutors have been examining about 19,000 accounts at the bank, but UBS ultimately may disclose the identities of only a few hundred customers.
But to some, turning over any names at all heralds the end of the secret Swiss bank account, whose traditions date to the Middle Ages.
“The Swiss are saying that this is the end of Swiss banking as they knew it,” said Jack Blum, an offshore tax specialist. “Nobody will trust the security of the Swiss bank account.”
As part of the settlement, UBS agreed to cooperate with a broad summons issued by the Justice Department to turn over the names. Under the terms of a so-called deferred prosecution agreement, the bank and its executives could be indicted if UBS didn’t identify the customers.
UBS has said it is closing the offshore accounts of its American clients. But under the deal with the United States authorities, the bank must provide periodic written evidence of that to prosecutors. UBS earned $200 million annually from the business.
Prosecutors suspect that from late 2002 to 2007, UBS helped American clients illegally hide $20 billion, letting them evade $300 million a year in taxes.
In a striking admission, UBS said that from 2000 through 2007, some of its private bankers and managers had “participated in a scheme to defraud the United States” and the I.R.S. by helping American clients set up and conceal offshore accounts. The scheme involved falsifying or not properly obtaining or filing certain tax forms required of both the bank and its clients.
UBS’s offshore private banking business once employed some 60 private bankers in Lugano, Zurich and Geneva. Prosecutors claimed UBS referred clients to lawyers and accountants who set up secret offshore entities to conceal assets from the I.R.S.
UBS urged some American clients to destroy records and to stash watches, jewelry and artwork that they had bought with money hidden offshore in safe deposit boxes in Switzerland. The bank also encouraged them to use Swiss credit cards so the I.R.S. could not track purchases. In a statement on Wednesday, Peter Kurer, the chairman of UBS, said that “UBS sincerely regrets the compliance failures in its U.S. cross-border business that have been identified by the various government investigations in Switzerland and the U.S., as well as our own internal review. We accept full responsibility for these improper activities.”
Marcel Rohner, the group chief executive of UBS, said in a statement that “it is apparent that as an organization we made mistakes and that our control systems were inadequate.”
In January a senior UBS executive, Raoul Weil, was declared a fugitive, two months after being indicted by a federal judge in connection with the investigation of the bank. Mr. Weil, a Swiss citizen, oversaw the cross-border private banking operations from 2002 to 2007.
UBS had fiercely resisted turning over the names, even after some executives were indicted and implicated in the offshore private banking business. Swiss law distinguishes broadly between tax avoidance, tax evasion and tax fraud. Unlike in the United States, tax evasion is not a criminal offense under Swiss law.
The move by UBS to settle the case, on the eve of a Senate subcommittee hearing next Tuesday on the matter, signals how close the bank came to being indicted for not cooperating with prosecutors. Indictment is a near-certain death knell for corporations.
Of the $780 million that UBS will pay, $380 million represents disgorgement of profits from its cross-border business. The remainder represents United States taxes that UBS failed to withhold on the accounts. The figures include interest, penalties and restitution for unpaid taxes
As part of the deal, UBS also entered into a consent order with the Securities and Exchange Commission in which it agreed to charges of having acted as an unregistered broker-dealer and investment adviser for Americans.
The settlement caps a painful run for UBS, which suffered more than $50 billion in losses in the collapse of the American mortgage market and received a $60 billion bailout from the Swiss government last October.
The bank will not have to pay additional fines and penalties, which could have brought the deal to more than $1 billion. People briefed on the issue said the banking crisis and the recession were factors in this decision by prosecutors.
Comrade Greenspan: Seize The Banks!
The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.
In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.
”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”
Mr Greenspan’s comments capped a frenetic day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation.
“We should be focusing on what works,” Lindsey Graham, a Republican senator from South Carolina, told the FT. “We cannot keep pouring good money after bad.” He added, “If nationalisation is what works, then we should do it.”
Speaking to the FT ahead of a speech to the Economic Club of New York on Tuesday, Mr Greenspan said that “in some cases, the least bad solution is for the government to take temporary control” of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism.
The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”
But he cautioned that holders of senior debt – bonds that would be paid off before other claims – might have to be protected even in the event of nationalisation.
”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”
Mr Greenspan’s comments came as President Barack Obama signed into law the $787bn fiscal stimulus in Denver, Colorado. Mr Obama will announce on Wednesday a$50bn programme for home foreclosure relief in Phoenix, Arizona. Meanwhile, the White House was working last night on the latest phase of the bailout for two of the big three US carmakers.
In his speech after signing the stimulus, which he called the “most sweeping recovery package in our history”, Mr Obama set out a vertiginous timetable of federal decisions in the coming weeks that included fixing the US banking system, submission next week of the 2009 budget and a bipartisan White House meeting to address longer-term fiscal discipline.
“We need to end a culture where we ignore problems until they become full-blown crises,” said Mr Obama. “Today does not mark the end of our economic troubles… but it does mark the beginning of the end.”
Obama Goes To Bat For Banks
Ten days ago, we reported on Open Left that bankruptcy “cram-down” mortgage relief would not appear in the stimulus, but would appear in a different piece of legislation later this year. Despite our reports, the fight over bankruptcy “cram-down” legislation in the stimulus did not actually end ten days ago. As recently as Thursday, House Democrats will still fighting in to include the measure in the stimulus, and Senator Dick Durbin, the leading proponent of the measure in the Senate, was denying that President Obama was opposed to including the measure in the stimulus.
However, any lingering doubt about the fate of bankruptcy “cram-down” reform in the stimulus can now be put to rest. Senator Durbin has confirmed that President Obama opposes including the measure in the stimulus, and favors including it in later legislation instead (more in the extended entry):
Chris Bowers :: Tough Road Ahead for Bankruptcy Reform
The key to passage of the bankruptcy bill is the Senate, where Democrats need 60 votes to stop a possible filibuster. Ten Democrats — all still in the Senate — would not back the plan in a vote a year ago.
Sen. Dick Durbin, D-Ill., the chief Senate sponsor of the bill, said Obama persuaded him in a White House meeting Friday to remove the bankruptcy proposal from an economic recovery package — to ensure it doesn’t jeopardize the stimulus bill. But Obama pledged his support for the bankruptcy solution, Durbin said.Obama said he would work with Durbin to attach the proposal to other ”must pass” legislation — with the hope that supporters of the overall bill would not vote against it because of the bankruptcy provisions.
There will definitely be no cram-down in the stimulus now. Further, with ten Senate Democrats opposed to the measure last year, we can also expect a big fight over the measure when the home foreclosure mitigation bill comes up later this year. In fact, The ten Democrats in question are actually eleven, now that Lieberman is back in the caucus. Baucus (MT), Byrd (WV), Carper (DE), Johnson (SD), Landrieu (LA), Lieberman (CT), Lincoln (AR), McCaskill (MO), Nelson (NE), Pryor (AR) and Tester (MT). Without a single Republican defector, this will be a difficult bill to pass at any point.
However, there are rays of hope. First, the economic crisis might actually be changing votes. For example, Mike Thompson, one of the sixteen House Blue Dogs who in 2007 sent out a letter opposing cram-down legislation, offered a promising response to Open Left commenter kaleidescope when s/he called Thompson’s office about cram-down legislation in the stimulus:
I called my Representative, Mike Thompson (CA-1), a blue dog, about HR 225. My experience is that you get better results if you call the local (as opposed to the D.C.) office. You get to talk to a career staffer instead of an intern. Thompson’s Eureka staffer told me Thompson is starting to edge away from his blue dog affiliations. She noted that he is fiscally conservative, but that “everything has changed in the economy” since 2007.
Second, there is always the hope of working a deal where the Democrats who are opposed agree to not filibuster, but then vote “no” on an up-or-down, simple majority vote for the legislation.
It is pretty sad that, even with the Democratic trifecta and even with the collapse of the credibility of the banking industry, that the banking lobby can still delay, and possibly even stop, good legislation like this. They can twist Congressional arms into forking over trillions of dollars on their behalf, all the while twisting those arms to make sure homeowners facing foreclosure get nothing. At least it makes it clear who is actually running the country.
A Quiet Windfall For U.S. Banks
With Attention on Bailout Debate, Treasury Made Change to Tax Policy
By Amit R. Paley
Washington Post Staff Writer
Monday, November 10, 2008; A01
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.”
The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Henry M. Paulson Jr. in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.
The change to Section 382 of the tax code — a provision that limited a kind of tax shelter arising in corporate mergers — came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, its opponents thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists.
Andrew C. DeSouza, a Treasury spokesman, said the administration had the legal authority to issue the notice as part of its power to interpret the tax code and provide legal guidance to companies. He described the Sept. 30 notice, which allows some banks to keep more money by lowering their taxes, as a way to help financial institutions during a time of economic crisis. “This is part of our overall effort to provide relief,” he said.
The Treasury itself did not estimate how much the tax change would cost, DeSouza said.
A Tax Law ‘Shock’
The guidance issued from the IRS caught even some of the closest followers of tax law off guard because it seemed to come out of the blue when Treasury’s work seemed focused almost exclusively on the bailout.
“It was a shock to most of the tax law community. It was one of those things where it pops up on your screen and your jaw drops,” said Candace A. Ridgway, a partner at Jones Day, a law firm that represents banks that could benefit from the notice. “I’ve been in tax law for 20 years, and I’ve never seen anything like this.”
More than a dozen tax lawyers interviewed for this story — including several representing banks that stand to reap billions from the change — said the Treasury had no authority to issue the notice.
Several other tax lawyers, all of whom represent banks, said the change was legal. Like DeSouza, they said the legal authority came from Section 382 itself, which says the secretary can write regulations to “carry out the purposes of this section.”
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.
Lawmakers decried the tax shelters as a scam and created a formula to strictly limit the use of those purchased losses for tax purposes.
But from the beginning, some conservative economists and Republican administration officials criticized the new law as unwieldy and unnecessary meddling by the government in the business world.
“This has never been a good economic policy,” said Kenneth W. Gideon, an assistant Treasury secretary for tax policy under President George H.W. Bush and now a partner at Skadden, Arps, Slate, Meagher & Flom, a law firm that represents banks.
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.
During the current Bush administration, senior officials considered ways to implement some version of the policy. A Treasury paper in December 2007 — issued under the names of Eric Solomon, the top tax policy official in the department, and his deputy, Robert Carroll — criticized limits on the use of losses and suggested that they be relaxed. A logical extension of that argument would be an overhaul of 382, according to Carroll, who left his position as deputy assistant secretary in the Treasury’s office of tax policy earlier this year.
Yet lobbyists trying to modify the obscure section found that they could get no traction in Congress or with the Treasury.
“It’s really been the third rail of tax policy to touch 382,” said Kevin A. Hassett, director of economic policy studies at the American Enterprise Institute.
‘The Wells Fargo Ruling’
As turmoil swept financial markets, banking officials stepped up their efforts to change the law.
Senior executives from the banking industry told top Treasury officials at the beginning of the year that Section 382 was bad for businesses because it was preventing mergers, according to Scott E. Talbott, senior vice president for the Financial Services Roundtable, which lobbies for some of the country’s largest financial institutions. He declined to identify the executives and said the discussions were not a concerted lobbying effort. Lobbyists for the biotechnology industry also raised concerns about the provision at an April meeting with Solomon, the assistant secretary for tax policy, according to talking points prepared for the session.
DeSouza, the Treasury spokesman, said department officials in August began internal discussions about the tax change. “We received absolutely no requests from any bank or financial institution to do this,” he said.
Although the department’s action was prompted by spreading troubles in the financial markets, Carroll said, it was consistent with what the Treasury had deemed in the December report to be good tax policy.
The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.
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.
Attorneys representing banks celebrated the notice. The week after it was issued, former Treasury officials now in private practice met with Solomon, the department’s top tax policy official. They asked him to relax the limitations on banks even further, so that foreign banks could benefit from the tax break, too.
Congress Looks for Answers
No one in the Treasury informed the tax-writing committees of Congress about this move, which could reduce revenue by tens of billions of dollars. Legislators learned about the notice only days later.
DeSouza, the Treasury spokesman, said Congress is not normally consulted about administrative guidance.
Sen. Charles E. Grassley (R-Iowa), ranking member on the Finance Committee, was particularly outraged and had his staff push for an explanation from the Bush administration, according to congressional aides.
In an off-the-record conference call on Oct. 7, nearly a dozen Capitol Hill staffers demanded answers from Solomon for about an hour. Several of the participants left the call even more convinced that the administration had overstepped its authority, according to people familiar with the conversation.
But lawmakers worried about discussing their concerns publicly. The staff of Sen. Max Baucus (D-Mont.), chairman of the Finance Committee, had asked that the entire conference call be kept secret, according to a person with knowledge of the call.
“We’re all nervous about saying that this was illegal because of our fears about the marketplace,” said one congressional aide, who like others spoke on condition of anonymity because of the sensitivity of the matter. “To the extent we want to try to publicly stop this, we’re going to be gumming up some important deals.”
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.”
Carol Guthrie, spokeswoman for the Democrats on the Finance Committee, said it is in frequent contact with the Treasury about the financial rescue efforts, including how it exercises authority over tax policy.
Lawmakers are considering legislation to undo the change. 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. Such action could undo the notice going forward or make it clear that it was never legal, a move that experts say would be unlikely.
But several aides said they were still torn between their belief that the change is illegal and fear of further destabilizing the economy.
“None of us wants to be blamed for ruining these mergers and creating a new Great Depression,” one said.
Some legal experts said these under-the-radar objections mirror the objections to the congressional resolution authorizing the war in Iraq.
“It’s just like after September 11. Back then no one wanted to be seen as not patriotic, and now no one wants to be seen as not doing all they can to save the financial system,” said Lee A. Sheppard, a tax attorney who is a contributing editor at the trade publication Tax Analysts. “We’re left now with congressional Democrats that have spines like overcooked spaghetti. So who is going to stop the Treasury secretary from doing whatever he wants?”
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