Boy, am I glad that the government pumped billions of dollars into the banking industry!
Since that time, borrowing has become significantly easier. Wait, that hasn’t happened?
Well, at least the Dow regained its faith in the market. Wait, that didn’t happen either?
What did happen? Oh yeah, banks made more money.
Need proof? I mean, beyond the loss of bad debt and influx of capital, courtesy of we, the taxpayers? Look no further than PNC Financial Services Group Inc. According to reports, PNC will save billions in federal taxes after its purchase of National City Corp now that the IRS has issued a controversial notice following the failure of the original bail-out package.
So here’s what happened. It used to be the case that the built-in loss that a buyer could use to offset income after an acquisition was capped at 5% of the purchase price per year for five years. The new rule removes the limit for the banking industry – and only the banking industry – resulting in an immediate and significant tax benefit. The new rule is effective “unless and until” additional guidance is issued, whenever that might be.
How much of a benefit does that give PNC? Tax analysts have tossed around numbers as high as $5.1 billion. And PNC isn’t the only bank to benefit. Banks which gobble up other banks with just bad housing debt (not counting other bad debt) may now save up to $140 billion in taxes – about 20% of the total banking bailout put up by the feds. And who pays for that? Who do you think? Tax savings for those banks equals lost revenue in an already strained economy.
And you don’t even have to be a “real bank” to qualify. All banks, including credit card companies, industrial loan companies, trust companies and thrifts (used for mortgages) are included.
Congressional officials – who weren’t consulted on the IRS notice – are not necessarily thrilled with the results. Senator Charles Schumer (D-NY) who sits on the Senate Banking Committee voiced concerns that the ruling would give some banks an unfair advantage. For example, Schumer claims that Wells Fargo will save $19.4 billion in federal taxes for its win over Citibank to purchase Wachovia, an amount which surpasses the proposed purchase price.
Those cheering the notice say that this gives banks an additional incentive to buy “struggling” banks. But opponents say it just feeds merger mania, giving mega-banks an disproportionate financial incentive to take on more bad debt. Further, those in other sectors of the economy question why incentives were limited to the banking industry; so far, the IRS has not issued additional comment.
I’m not sure where I fall. I believe that something needs to be done to get us out of this mess – but the fixes seem haphazard and short sighted. Plus the timing and process of this tax incentive doesn’t quite meet the smell test: one day after Congress rejects the bailout, the Treasury changes the rules on its own? What do you think?
You can read the entire text of Notice 2008-83 here.
Wow… this hits close to home. I think that PNC purchasing NC should not be allowed. How is it that PNC gets bailout money when NC was denied, and then PNC uses their money to snatch up NC, which will cause many job losses in OH, PA, and KY? Stupid. Thanks for getting this out there-GREAT POST!!