As with the Wells Fargo case, the generosity of the tax break leaves one dumbfounded. As the Cleveland Plain Dealer asks:
How can PNC pay $5.6 billion for National City and get back more than $5 billion in tax breaks?It's a rhetorical question, of course: the Plain-D guys know that this tax break exists because of clever back-room maneuvering by Bush Administration Treasury officials. The short explanation: 20 years ago, Congress passed a law (as part of the justly-celebrated Tax Reform Act of 1986) that prohibited banks from buying loss-ridden banks as a tax dodge. While lobbyists pushed hard for Congress to undo this change for, well, the next 20 years, they were unsuccessful-- until the Treasury Department decided to change the law themselves by issuing a notice saying that they've changed their interpretation of the law. Oversimplying a bit, Treasury officials have taken a law that says "this tax scam is not allowed" and basically crossed out the "not".
Plenty of people are now paying attention to this anti-democratic outrage, not least among which are the members of Congress who view the creation of absurd tax breaks as their domain alone. (They're right, for better or for worse.) But the real question remains: what can be done about this?
An incoming Obama Administration can (and should, if all else fails) simply rewrite the administrative regulations. Again resorting to a gross oversimplification, this means un-crossing-out the "not" mentioned above.
Alternatively, tax writers in Congress (who are peeved that Treasury usurped their authority on this one) could pass a law preventing banks from using this made-up loophole going forward.
A stickier issue is whether anything can be done to take away the tax breaks already claimed by Wells Fargo and PNC. If their purchases of unprofitable banks were driven by the tax break, it may seem unfair to take the tax breaks away retrospectively, but there's enough unfairness to go around: Wells Fargo got a tax break that Citigroup didn't, entirely because Wells Fargo tried to buy Wachovia right after Treasury's announcement-- and Citigroup had the bad luck to make its acquisition bid right BEFORE Treasury's announcement. Ain't nothing fair about that.
It would probably be best for Congress to tackle this one head on, even as it deals with allegations that the direct bailout costs (the much-ballyhooed $700 billion) are being doled out indiscriminately. Let's hope they do!