Now it makes sense

It was only a short time ago that Wells Fargo walked away from the deal for Wachovia and North Carolina's biggest bust, after Liddy Dole, was going to Citibank. So what made Wells coming racing back in with a $15 Billion offer for a piece of the big shitpile? How about the chance to pocket $74 Billion in tax free profit?

Wells Fargo's deal for Wachovia could cost the federal government billions of dollars in lost revenue as the San Francisco company takes advantage of a new change in federal tax regulations designed to encourage bank mergers.

The change was made Tuesday by the Treasury Department, one day after Wachovia agreed to be rescued by Citigroup, and two days after Wells Fargo walked away from the table, leaving Citigroup as the only bidder.

With the change in place, Wells Fargo renewed its pursuit of Wachovia, and yesterday announced a surprise deal to buy the entire company for about $15.4 billion, topping Citigroup's $2.2 billion deal for most of it.

..experts in tax law said the Wells Fargo deal actually was likely to be more expensive for the government. Losses on Wachovia's portfolio of bad loans would have been absorbed by the FDIC, which is funded by the banking industry. Under the tax law change, those losses instead will allow Wells Fargo to reduce its taxable income.

"They said they're doing it without federal assistance, but in reality they are doing it with federal assistance. It's just tax assistance," said Robert Willens, an expert on tax accounting who runs a firm of the same name.

The amount of lost tax revenue would depend on the future profitability of Wells Fargo and the losses on Wachovia's loans, but based on Wells Fargo's financial disclosures, it could shelter $74 billion in profits from taxation.

Companies are allowed to shelter profits from taxation based on their past losses. When a profitable company buys a company with losses, however, the government historically has limited the profitable company's ability to shelter its income based on the acquired company's losses. In the case of Wells Fargo, the company could only have sheltered about $1 billion in income each year, said Willens, the accounting expert.

The Tuesday change, however, specifically removes limits on the income banks can shelter based on the losses of acquired companies. In announcing its deal for Wachovia, Wells Fargo estimates it would write down $74 billion in losses on Wachovia's loan portfolio.

Losses can be used to shelter income for as long as 20 years.

Wachovia was always a profitable target but the Bush/Paulson Treasury change made it a honeypot. And now the public will pay even more for it.