Mark Thoma brought another accounting scam to my attention. There used to be an IRS rule that limited the amount of losses an acquiring company could use as tax write-offs from acquiring another company that has a LOT of losses. No more. The new rule specifically exempts banks from from any limit to tax write-offs and that's one reason Wells Fargo was so eager to buy Wachovia:
Tax ruling may have aided Wells' bid for Wachovia
By MARCY GORDON (AP)
Business Week
October 3, 2008, 6:49PM ET
New leeway the IRS has granted to banks seeking to write-off losses likely inspired the nearly $13 billion premium Wells Fargo & Co. agreed to pay for Wachovia Corp. above Citigroup Inc.'s previous offer.
Analysts said the change made by the IRS this week could spur further consolidation within the debilitated banking industry.
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.
In the NYT, Mark Sunshine makes this plain:
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.
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