Friday, April 25, 2008

US taxpayer on the hook for all of Wall Street's credit losses

Ilargi: Yeah, why not? Once you nationalize the entire industry (or their losses), there's little reason to have them continue to pay taxes over their profits, right?

Anyway, it's not as if the US government needs the money or anything. And if they do need some cash to raise some cane on a faraway plain, there's always you. Wall Street is having a hard enough time as is. It's time for you to do your bit.

Right now, this next insult would at first sight seem to be $290 billion worth in mortgage-related losses that you're on the hook for, but all other credit losses count as well, so it won't stop there, not by a long shot.

It won't even stop at $1 trillion, I confidently predict. Or two.

Fannie, Freddie May Pay Lower Taxes After Rule Change
Fannie Mae, Freddie Mac and other companies suffering as mortgage delinquencies rise won a two-year battle with the IRS yesterday, allowing them to use those losses to reduce their tax burden.

The Internal Revenue Service withdrew proposed regulations that had asserted that mortgage loans are capital assets and any losses from them could be used only to offset capital gains. The agency also said it wouldn't challenge companies that count such losses against ordinary income.

The action also clears the way for Fannie Mae, Freddie Mac and some other holders of defaulted loans ranging from auto lenders to credit card issuers to benefit from Senate-passed tax legislation that would allow companies to apply those losses against previous tax years to get immediate refunds.

So far, 70 of the world's biggest banks, securities firms and mortgage companies have taken about $290 billion in asset writedowns and credit losses since the beginning of 2007.

"This is a serious windfall," said Christopher Whalen, managing director of Hawthorne, California-based Institutional Risk Analytics. "Essentially, the Street gets a $290 billion tax shelter they did not have available" under the earlier IRS position.

'Carry Back'

Tax law generally allows companies to "carry back" losses realized this year to previous years and get a refund for earlier taxes paid or apply them to later years, known as a "carry forward" to reduce future liability. Carry backs currently are limited to two years; the Senate legislation would temporarily expand that to four. A House panel passed a separate relief measure that doesn't contain the provision.

Winning the right to treat mortgage-loan losses as a loss against regular income is "a great victory for Fannie Mae," which led lobbying efforts against the regulations, said Robert Willens, president of a New York tax-consulting firm and an expert on tax and accounting rules.

"It means that the losses they sustain on these instruments will be eligible for the four-year carry back, assuming that provision gets enacted," Willens said. The biggest beneficiaries of the IRS action will be Fannie, Freddie and mortgage originators, he said.

As the nation's two biggest mortgage investors, Fannie and Freddie both posted record mortgage losses during the fourth quarter, $3.55 billion at Fannie and $2.45 billion at Freddie.

'Billions of Dollars'

Pete Davis, president of Davis Capital Investment Ideas in Washington, told clients in an e-mail today that the IRS's action "could easily be worth billions of dollars" to the two government-sponsored enterprises. Fannie Mae fell 39 cents to $26.74 and Freddie Mac fell 73 cents to $24.86 at 2:35 p.m. in trading on the New York Stock Exchange.

The Senate passed the provision earlier this month as part of legislation intended to alleviate the housing crisis. For Fannie Mae, the withdrawal caps an almost two-year regulatory tussle with the IRS, which first issued the rules in August 2006. In comments to the tax agency later that year, the company called the proposed regulations "not sound tax policy" because they would force its effective tax rate to rise higher than the statutory 35 percent.

Congressional Testimony

The company testified against the rules at an August 2007 hearing along with the Mortgage Bankers Association, the American Bankers Association and McLean, Virginia-based Freddie Mac.

"There were a lot of concerns raised," said Andrew DeSouza, a Treasury spokesman for tax policy. "In the course of examining this issue, we decided to withdraw the regulation and also let taxpayers know that the IRS will not challenge positions taken on tax returns that apply existing case law under that specific section of the tax code."

Other companies and organizations called for the regulations' withdrawal, including the Association of International Automobile Manufacturers, HSBC Holdings Plc's North American unit, American Express Co., and the Federal Agricultural Mortgage Corp., or Farmer Mac.

The National Association of Home Builders warned in November 2006 that the proposed regulations would have increased costs for homebuyers. Fannie Mae spokesman Brian Faith and Freddie Mac spokesman Michael Cosgrove declined to comment. The IRS said it would continue to study the issue.

Though Washington-based Fannie Mae took the lead in opposing the rule, the IRS decision would benefit Wall Street firms and other investors that have billions in mortgage losses piling up in their books.

The entire industry would benefit since most of its profits are derived from ordinary income, not capital gains.


Anonymous said...

How about:
"US taxpayer on the hook for the lot".

Just have the FHC and Fannie Mae buy up all the outstanding mortgage backed paper, then act as landlord when mortgagees default, turn the security into government housing. 3-7 trillion ought to do it.

Then when securities backed by credit-card debt look shakey, get the Fed to "swap" a few trillion worth for Treasuries - the goverment can borrow a couple of trillion then lend the money to the Fed for "stabilization".

So that puts us in the 5-10 trillion range.

Wanna bet it won't happen?

Anonymous said...

... the IRS decision would benefit Wall Street firms and other investors that have billions in mortgage losses piling up in their books.

ilargi, if you can find the time would you put that in some sort of context in what that means to US taxpayers, maybe as a percentage lost in services? Trillion seems a large bite.

BTW, Cute picture of Bush passing that burning buck. I don't think I would like to be the recipient.

Also BTW anyone seen Musashi lately?

Anonymous said...


That's hard to say, we're talking huge amounts of money. Or at least potentially. You'd have to know how much all these boys pay in taxes in the first place. Which often isn't much. But they can carry this stuff back and forth over the years, and in the end that may mean they get money from the IRS, not the other way round. Also, what if derivatives losses can be treated this way? We're not far off, if not already there.

As for services lost: your guess is mine. A $2 trillion war may have cut a few perks as well,

Pard42 said...

I think it's about time for the american public to express our disdain for our representatives in the House and Senate!
It is my opinion that congress,as a
whole,is more concerned about their money from lobbies than the electorate,or the country.
What we need is a "house cleaning". We don't need guns or other violent responses. We use the VOTE. When we go into the ballet booth, WE VOTE AGAINST EVERY
INCUMBANT. if an incumbant is unopposed, don't vote for him/her at all. It will get their attention if they are used to getting millions of votes an only get thousands. It would also help insure he/she is not unopposed in the future. Hopefully, it will be a wakeup call for those not up for reelection. This should be done at the state and local level also.
I believe that the greatist mistake the country ever made was the acceptance of career politicans.
Thank you for The Automatic Earth!

Anonymous said...

Hey CR,
Just came back from a 2 week motorcycle trip.
Other then a good time, BBQ and fire water with old friends we looked at farmland and discussed how things could be set up in the near future.
Now I have to sleep for a few days and catch up with my reading.

Anonymous said...

The only thing I saw related to the blog was what seemed like thousands of car hauler railroad cars parked along the routes and apparently unused from slight rust on the wheels. Doesn't look good for Detroit.
Rail traffic was going east with Chinese logo containers at a rate of at least 5 to 1 compared to west bound rail traffic.
Truck traffic seemed a little light but not much, car traffic was almost nonexistent other then immediately next to major cities, and even that seemed light to prior years, despite that for the most part gas was still under $4.
Also noticeably more abandoned small towns compared to as little as 2 years ago.
It seems that the rural working people are much more aware of the situation then the rich and welfare queens in the cities.