Bailed Out Banks Receive Huge Tax Breaks For Christmas

Bailout Banks Keep Tax Breaks As They Repay Loans


Citigroup and other banks starting to repay the billions of dollars they borrowed from the government are getting another boost as they exit the bailout program: Billions more in tax breaks.

Tax law allows money-losing corporations like Citigroup Inc. and General Motors Co. to use current net operating losses to offset future taxable income, reducing their tax bills for up to 20 years after the losses occur.

Under ordinary circumstances, those tax breaks would be severely limited if the companies underwent an ownership change, much like many of them did when the government acquired big blocks of their stock.

Losing the tax breaks would have substantially reduced the value of the companies, even as the government was trying to prop them up with bailout funds.

The Treasury Department didn't want that to happen, so it started issuing tax guidance about a year ago that said the rules didn't apply when the government, through its bailout programs, caused the ownership change.

Last week, Treasury issued additional guidance saying that the rules also won't apply when the government sells its stock. The new rules mean that Citigroup and other bailout companies will still be able to take advantage of tax breaks worth billions of dollars, once they become profitable and start paying taxes again.

For tax purposes, it's like the government's ownership never happened, said Robert Willens, a corporate tax accountant in New York.

The size of the tax breaks will depend on how soon the companies become profitable, Willens said. "It's certainly in the billions," he said.

Citigroup announced this week that it was repaying $20 billion to the government's Troubled Assets Relief Program, or TARP. Citigroup had taken a total of $45 billion in rescue funds – among the largest bailout packages received by any bank – but the government converted $25 billion of that amount into a 34 percent equity stake, which it is now selling.

The tax breaks will cost the government billions of dollars in tax revenue, but the government's stock in the companies is worth more because value of the companies is higher.

Treasury spokeswoman Nayyera Haq said the guidance issued last week was not targeted toward any individual company. It was released last week because Treasury was expecting a number of banks to start paying back their loans, exiting the bailout program.

"This guidance is the part of the government's orderly exit from TARP," Haq said.

She defended the overall strategy of helping bailout companies preserve their tax breaks, pointing out that the original law was intended to prevent corporate raiders from taking over money-losing companies simply to cash in on their tax breaks.

"This rule was designed to stop corporate raiders from using loss transactions to evade taxes, and was never intended to address the unprecedented situation where the government owned shares in banks," Haq said. "And it was certainly not written to prevent the government from selling its shares for a profit."

Willens said the Treasury Department's strategy makes sense. However, he said, it highlights an unprecedented government intervention in the private sector.

"We've never seen anything like this," Willens said. "The unilateral actions they are taking are unprecedented. This is just one of many."






Wells Fargo: "We're comfortable" with lower capital


To repay its government loans, Wells Fargo & Co. will make a trade-off: Its capital levels will fall below those of its competitors.

But in a call with analysts Tuesday morning, chief executive John Stumpf signaled that he wasn't concerned. And several analysts later said the fact that the government is letting Wells maintain a lower capital level is actually a good sign.

"It signals the government has confidence in the earnings power at the bank," Paul Miller, an analyst at FBR Capital Markets, wrote in a note to clients.

Also Tuesday, Wells sold $12.25 billion in stock to help repay its federal loans. That was more than the $10.4 billion it initially expected. Chief financial officer Howard Atkins said the bank was "very pleased with the positive reception from investors."

"We appreciate the confidence investors have demonstrated in Wells Fargo's strength and future prospects," he added.

Wells had announced Monday night that it intends to repay its $25 billion loan from the government's Troubled Asset Relief Program, or TARP. It was anxious to avoid being the last big bank still holding TARP money, after rival Citigroup Inc. announced hours earlier that it would repay its loans.

After it repays TARP, Wells will have a Tier 1 common ratio of 6.2 percent. The ratio is a measure of a bank's ability to absorb losses, and it's closely watched by regulators. Bank of America Corp., JPMorgan Chase & Co. and Citigroup all have or will have Tier 1 common ratios of 8 to 9 percent without TARP funds.

Stumpf said that his bank's capital needs are different from those of other banks, which might have riskier balance sheets. He also noted how Wells has already written down many of its potential losses from Wachovia Corp., the Charlotte bank that it bought last year.

"We don't have a big trading book, we don't have a lot of international assets, we're fairly meat and potatoes, and we have the industry's best margin of all the banks," Stumpf said, responding to a question from one analyst. "So you put all that together, we're comfortable with these ratios."

He also noted how his bank has historically maintained high levels of capital: "It allowed us to do something called Wachovia."

But the questions about capital levels weren't out of the blue. Last week, the House passed a massive financial regulation bill that would, among other things, require big banks to maintain higher levels of capital. Wells' Tier 1 common ratio of 6.2 percent is still well above the regulatory requirement of 4 percent

Stumpf declined to elaborate on the bank's repayment discussions with regulators. "I'm really not in a position to discuss the negotiations with the other party," he said. "I just don't think it would be productive."

Wells on Tuesday sold about 490 million shares at $25 each, raising the $12.25 billion. That better-than-expected amount eliminates a requirement where Wells would have had to sell a small number of assets in 2010.

However, issuing stock dilutes the value of shares held by current investors, since earnings have to be spread among more people. Miller, the analyst, estimated that Wells' stock raise will dilute shares by 11 percent.

But several analysts also said that, overall, getting rid of TARP will place Wells shares on firmer ground.

"The company still faces some headwinds ... but the TARP repayment certainly removes some concerns and eliminates some negatives to the story," R. Scott Siefers, an analyst at Sandler O'Neill + Partners, wrote in a note to clients.

Stumpf took the opportunity to praise the Wachovia deal, which he does in virtually every public appearance. He also mentioned Wells' announcement Monday, issued shortly after its TARP announcement, that it would use cash to buy out Prudential Financial's stake in the joint retail brokerage business. Wells had said this summer that it would use a combination of cash and stock to purchase Prudential's stake, which represented about a quarter of the joint business.

Stumpf said that paying totally in cash is "in our shareholders' best interest." That's because paying in stock would have diluted the holdings of existing shareholders. Wells said it would spend $4.5 billion.

Stumpf was joined on the call by bank chairman and former CEO Dick Kovacevich, who has been one of the most outspoken critics of the government's intervention in the banking industry. Kovacevich spoke briefly at the beginning of the 25-minute call, saying that Stumpf and his management are "the most talented team I've ever worked with."

Kovacevich is stepping down as chairman at the end of this month. He stayed on past the mandatory retirement age to help with the integration of Wachovia.



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