Home
Lead Tax Report
The following story is from the November 17 issue of the Daily Tax Report.
Financial Institutions
Grassley Asks Treasury Inspector General
To Investigate Issuance of Notice 2008-83
Senate Finance Committee ranking Republican Charles Grassley (R-Iowa) Nov. 14 asked Treasury Inspector General Eric Thorson to investigate Treasury's issuance of Notice 2008-83, guidance that responded to the financial crisis by lifting restrictions on the ability of banks to use losses after an acquisition under tax code Section 382.
In a letter to Thorson requesting the inquiry, Grassley raised concerns about both Treasury's legal authority to issue the notice and about possible conflicts of interest involving Treasury officials, former Goldman Sachs executives, and board members in the sale of Wachovia Corp. to Wells Fargo, which many believe was enabled by the notice.
Notice 2008-83 was one in a series of notices and other pieces of guidance intended to help struggling banks survive (190 DTR G-6, 10/1/08; 195 DTR J-1, 10/8/08).
Wachovia Sale Focus of Inquiry.
Grassley asked Thorson to zero in on the Wachovia sale as a major part of the scrutiny, and to “obtain and review all documents and communication related to the issuance of Notice 2008-83, including all records of communication between Treasury officials, individuals at Wells Fargo, and/or Wachovia Corporation or their representatives.”
Although Treasury has maintained it had authority to write the guidance under tax code Section 382 (218 DTR G-2, 11/12/08), “Treasury's action raises significant questions about whether it exceeded implementing authority by attempting to change the law,” Grassley said in his letter to Thorson.
He said prior to the notice, the amount of income that an acquiring bank could shelter in order to be able to be able to absorb the losses of a bank it acquired was limited, but now “the notice allows an acquiring bank to use an acquired bank's losses to shelter its income without limitation.”
The lifting of those limits apparently enabled Wells Fargo to take over Wachovia despite a pending bid from Citibank, Grassley said.
Income Limit Change Enabled Deal, Grassley Says.
“Without the issuance of the notice, Wells Fargo would have only been able to shelter a limited amount of income,” he said. “Under the notice, however, Wells Fargo could reportedly shelter up to $74 billion in profits,” which potentially enabled Wachovia's senior executives to qualify for parachute payments that may not have been available under the Citibank deal, Grassley said.
Given the generosity of the guidance, Grassley said, in looking at prior relationships to major financial institutions within the Treasury Department, “there is reason for concern about the appearance of preferential treatment created by the Treasury Department's decision to issue Notice 2008-83.”
The letter laid out some relationships that Grassley found troublesome. For a start, he noted that Treasury Secretary Henry Paulson was formerly chairman and chief executive officer of Goldman Sachs, and former Goldman Sachs board member Edward M. Liddy was selected to lead American International Group, Inc. (AIG) when the company received its first $85 billion government loan.
Wachovia Head Recently Left Treasury.
Neel Kashkari, a former vice president at Goldman Sachs, is the head of Treasury's new Office of Financial Stability, the letter pointed out.
Grassley said in his letter to Thorson that the notice “appears to have had the effect of benefiting Wachovia Corporation executives and Wells Fargo,” noting that Robert Steel, the CEO of Wachovia, was a former undersecretary for domestic finance and a vice chairman at Goldman Sachs.
The Finance Committee Republican stressed that Steel joined Treasury in 2006 to work on issues pertaining to Fannie Mae and Freddie Mac, and left Treasury to become chief executive of Wachovia just this summer.
“The facts and circumstances surrounding the issuance of the notice, particularly as it relates to Wells Fargo's purchase of Wachovia Corporation, raise concerns about the independence of the decision makers,” Grassley said.
He asked that Thorson provide “periodic updates” on his progress should he agree to do the investigation.
Treasury Response.
Treasury Nov. 10 said it had the authority to lift restrictions on the use of losses by banks following an acquisition, in controversial September guidance that is now under scrutiny by Congress and the subject of an intense debate in the tax community.
“We take our regulatory authority very seriously and we work within those constraints,” Treasury spokesman Andrew DeSouza said Nov. 10. “We used that authority to provide clarifying guidance on the use of losses in bank acquisitions.
By Alison Bennett
