Monday, November 24, 2008

Tax benefits, Wells and Wachovia

The most repeated argument against my line that Sheila Bair erred badly when gifting Wachovia to Citigroup is that Wells could only make the alternative work because of tax benefits.

Lets dismiss that for once and for all.

The tax benefits would also have been available to Citigroup.  



Donald Pretari said...

But that doesn't obviate the argument that Bair acted reasonably prior to the tax cuts.

After the tax cuts were passed, it's quite possible that Wells Fargo could make a better deal than Citi. That's quite true.

But the FDIC had brought Citi into the process prior to the tax cuts. Their argument would be "Hey, we had a deal. You sought us out. Too bad for you".

I'm with the people that say we should have accepted the Wells Fargo offer. However, I do see a problem with government agencies effectively working at cross purposes.

Finally,it is still a fact that the tax subsidies were a necessary condition for Wells Fargo's bid, unless someone tells me otherwise.
It's free market to the extent that you figure in the lost tax revenues into the equation.

What am I missing here?

Don the libertarian Democrat

John Hempton said...

You are missing one thing. Sheila forced the issue... and then when Wells said they needed more time she over-rode it.

Very aggressive behaviour indeed for a public servant.


Donald Pretari said...

I don't really want to defend her, although she's trying hard with this mortgage plan she's introduced. But I'm suggesting that the rug was pulled out from under her by TARP. Also, I get the feeling that the FDIC and Treasury are in some conflict. I've seen you more as an FDIC person in this battle, but that's just my impression. I think that I'm more of an FDIC person, for sure, whether that's warranted or not. So, maybe that's why I'm defending her. If you want to let this issue go, just let my comment pass. I enjoy your blog immensely.

Don the libertarian Democrat

John Hempton said...

Hi Don,

Send me an email.

I don't think that either the Treasury or the FDIC has handled this well.

It is enormously difficult though and I will write up what I think are the policy options in a future post.


Anonymous said...

John--I have learned a lot from your blog, but I don't think you are right on this.

The tax benefits would certainly have been "available" to Citi, but the critical question is whether and how quickly they could be monetized. In other words, is it correct to assume that (after all of its other, non-Wachovia losses), Citi still had recoverable tax assets (its actual US federal tax payments for recent years and its timated tax deposits for the current year) that could be recovered if, and only if, it had the Wachovia losses?

My bet would be that this assumption is not true and that Citi could only have used the Wachovia losses against future taxable income which may well never materialize. If that is the case, then Citi, like GM, Fannie and Freddie, might not have been able to book an asset attributable to the tax benefits of the Wachovia losses.

By contrast, Wells Fargo appears to be in a different situation with fewer other tax losses. If so, then the Wachovia losses will produce an immediately recovery that would not otherwise be available.

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