Stormy noted that Wells Fargo’s bill is based in part on “exploiting a presumed tax loophole.”
I forgot to ask the question one should always ask when confronted with a Chess Ending problem, “What was the move before?”
In this case, we know (from A C Shareholder’s comment) that Wells had been discussions to purchase “WalkAllOverYa” last weekend. But they didn’t commit then, while, suddenly, Friday, they did, in what the Wall Street Journal editorial page would like us to believe is an example of free-market capitalism coming to the rescue:
A better canary in the cyclone is Thursday night’s news that Wells Fargo has agreed to buy Wachovia for $15.4 billion and without any government involvement. Only Sunday night, Wells Fargo had backed out of a similar deal for a higher price.
On Tuesday, the Internal Revenue Service issued guidance boosting banks’ ability to offset the losses from loans and other bad debts held by other banks they acquire. The guidance allows banks to take larger tax write-offs against future profits….
Before the IRS ruling this week, there were limits on the amount of certain losses that an acquiring bank could write off against post-combination profits. Now those limits have been suspended, said Jeff Harte, an analyst at Sandler O’Neill.
With banks suffering billions in losses from soured mortgage-related assets, the IRS move “potentially increases buyers’ ability to realize tax benefits from bank acquisitions,” Harte wrote in a note issued Friday. The change “could spur significant bank industry consolidation,” he said.
“We suspect that the new IRS guidance allowed Wells Fargo to place a higher bid for Wachovia today than it might have been willing to a few days ago,” Harte said.
And who was responsible for the IRS announcement? Mark Sunshine, guest-blogging at the NYT Economix blog, suggests it was Secretary of the Treasury Paulson:
But Mr. Paulson’s fiscal-stimulus work didn’t end with the bailout bill.
With hardly anyone noticing, on Wednesday he pushed through very technical and obscure changes to tax regulations that provide a “tax subsidy” for acquirers of troubled banks. Just as automakers stimulate car sales through rebate checks, the Treasury is providing a form of tax rebate to acquirers of troubled banks. Everyone can thank Hank Paulson and his stealth tax-driven fiscal stimulus for the astonishing news that Wachovia was being acquired by Wells Fargo and not Citigroup. It was Mr. Paulson’s tax subsidy to Wells Fargo that provided the fiscal grease to make this deal happen. Pundits who point to the deal and proclaim that the “free markets work without government help” don’t understand the motivating effect of several billion dollars of tax benefits to Wells Fargo.
Couldn’t have said that last better myself.