Thursday, November 13, 2008

"Quiet Windfall For US Banks"? - Washington Post Notes PNC & National City

There's a reference to the PNC - National City deal buried deep inside a Washington Post article. The story is about a controversial change in bank rules that the Post reports some people think may be illegal.

It's a fascinating piece of reporting, but the explanation of the rule change is itself hidden deep in the story:

Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.

Lawmakers decried the tax shelters as a scam and created a formula to strictly limit the use of those purchased losses for tax purposes.

But from the beginning, some conservative economists and Republican administration officials criticized the new law as unwieldy and unnecessary meddling by the government in the business world.

Here's the Post's PNC - National City reference:

Over the next month, two more bank mergers took place with the benefit of the new tax guidance. PNC, which took over National City, saved about $5.1 billion from the modification, about the total amount that it spent to acquire the bank, Willens said.

Now, the Post's reporting of the behind the scenes controversy in Washington:

In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.

The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.

"Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."

The Post story also provides reaction from some experts in the field:

The guidance issued from the IRS caught even some of the closest followers of tax law off guard because it seemed to come out of the blue when Treasury's work seemed focused almost exclusively on the bailout.

"It was a shock to most of the tax law community. It was one of those things where it pops up on your screen and your jaw drops," said Candace A. Ridgway, a partner at Jones Day, a law firm that represents banks that could benefit from the notice. "I've been in tax law for 20 years, and I've never seen anything like this."

More than a dozen tax lawyers interviewed for this story -- including several representing banks that stand to reap billions from the change -- said the Treasury had no authority to issue the notice.

Several other tax lawyers, all of whom represent banks, said the change was legal. Like DeSouza, they said the legal authority came from Section 382 itself, which says the secretary can write regulations to "carry out the purposes of this section."

Good work by Amit R. Paley of the Washington Post. I recommend reading the whole story.

Also this week: "National City was close to bankruptcy, PNC says" in the Post-Gazette:

National City Corp., the Cleveland-based bank being acquired by PNC Financial Services Group, may have faced bankruptcy if it didn't find a buyer.

In the Detroit Free Press:

Without a "definitive transaction" to provide liquidity, the Cleveland-based bank "would face additional regulatory actions, including intervention by the United States federal banking regulators, and/or be required to seek protection under applicable bankruptcy laws in the very near future," PNC said in a regulatory filing Monday.

National City, once among the nation's top 10 subprime lenders, accepted PNC's takeover bid after five straight quarterly losses tied to failed home loans that totaled more than $3 billion. National City's stock plunged 87% this year.

At, this AP story: 'PNC pledges $28M to charities in National City bid', promising to increase charitable giving in areas National City serves.

Pittsburgh-based PNC Financial Services Group Inc. said Wednesday it expects to surpass National City's current annual charitable contributions and community sponsorships with $28 million of support in 2009.

And in today's Trib:

National City Corp. is not receiving government money -- but tried to. The struggling Cleveland-based bank applied to the Treasury for money but was told Oct. 19 it would not receive any, according to a recent Securities and Exchange Commission filing.

Five days later, National City agreed to merge into PNC Financial Services Group in a $5.6 billion deal. PNC, in turn, will get $7.7 billion -- more than enough to cover the acquisition -- from the Treasury in exchange for preferred stock.



Anonymous said...

1 week earlier NCC in the quarterly condeference call for stock holders made no mention of this liquidity/bankruptcy issue. It still claimed to have one of the highest Tier ! capital positions in the banking industry. This bankruptcy news is a smoke screen to cover the problems caused by Dugan of the OCC giving himself the authority to choose the winners and losseres within the banking industry by with holding TARP funds from NCC, then giving then to PNC to buy NCC and then PNC using a newly introduce IRS/Treasury rule that gives a tax break lkarge enough to PNC that essentially makes the purchase of NCC close to free. Dugan & Paulson have hoodwinked Congress and the citizens in this bait & switch TARP maneuver. This does not fit the message the president gave today on letting the Free Market process do its magic. The treasury dept and OCC are a two headed snake! Congress should grow a set and stopp the PNC/NCC deal.

Anonymous said...

Jim Rohr's photo should run everyday on the front page of the Trib, not just the editorial page. Or, the post-office wall.