Tax Breaks for Banks Buying Banks

We’ve reported on the fact that many of the banks receiving bailout money are using it to buy other banks, instead of using it to increase lending. If you thought that the main point of the bailout was to reverse the credit freeze, there’s plenty of evidence that the Treasury Department actually intended it to spur further consolidation in the banking sector.

One more bit of evidence: an article in today’s New York Times reports that the day before Congress passed the $700 billion bailout, Treasury changed tax rules and “said that a bank was entitled to use all the losses related to troubled loans in a bank that it was purchasing, thus reducing its tax bill.” The article goes on:

The break, which can be applied to deals made years ago, before the financial crisis began, will hand banks at least $110 billion, according to Robert Willens, an independent tax and accounting analyst.

The department’s inspector general is reviewing the rule change, in response to complaints from members of Congress who say that the rule change was improper.

It may well have been improper, but it sure lends credence to the notion that bank consolidation was part of Paulson’s agenda all along. Here’s how much of a deal some banks are getting, according to the Times:

Several banks that have recently announced acquisitions will benefit from the tax break, which helps offset their own steep losses in ailing mortgages. Wells Fargo will be able to use $19.4 billion in losses at Wachovia, which it is buying for $15.1 billion.

And PNC, which will pay $5.6 billion for National City, will be able to use more than $5 billion in acquired losses to offset its own income.

Read the rest of the article (it’s quite short, and was buried in the business section).