Wells Fargo

How the Bush Treasury Department Helped its Friends and Screwed America

In the waning days of the criminal enterprise known as the Bush Administration, it has been revealed that the Treasury Department has granted massive tax breaks to corporations while world attention is focused on other matters.  A windfall of possibly $140 billion was achieved when a provision of the tax code was changed by a slight of hand.

No one in the Administration is taking direct credit for this fraud. However, the ideological underpinnings can be traced back to a 2007 memo written by two tax policy officials, Eric Solomon and Robert Carroll. The elimination of the “offending” rule serves as tribute to the infamous “torture” memoranda issued by the U.S. Attorney General Alberto Gonzalez, which was used as the legal underpinning for allowing waterboarding and other forms of prisoner abuse.

The Treasury Department memo sanctions the elimination of an I.R.S. rule that was established more than 20 years ago.  In 1986, Section 382 of the tax code was established to limit the sheltering of profits through the creation of shell companies whose only “value” were the losses they held.  This situation arose often in situations where a company acquired another company that was losing money. The losses from the acquired company could be used to offset profits made at the acquiring company.

While the idea of offsetting profits from losses incurred by buying another company may be subject to some debate and regulatory evaluation in the arcane world of tax policy, the Bush Administration and the Treasury Department bypassed the whole exercise through executive fiat.

Rather than go through a regulatory review process, consult with Congress or engage in some other form of democratic process, the Treasury Department wiped the slate clean and opened the door for a massive gift to the banking industry. The rule change came just 24 hours after Congress voted down the original bailout legislation in October. A number of experts named by The Washington Post suggest that this move was patently illegal.

Benefiting from this change were several major banks that have reaped the rewards of this fraud. Wells Fargo Bank is at the top of that list.

The Wells Fargo Ruling

Wells Fargo Bank was looking to acquire Wachovia Bank.  Wells Fargo had made some furtive attempts at acquiring Wachovia but had walked away from the deal because the numbers didn’t work. However, once Section 382 was eliminated, it created a $25 billion incentive for Wells Fargo and the deal went through within hours.

According to the Washington Post, two more bank mergers were completed on the coattails of this regulatory scheme. PNC acquired National City and saw a $5.1 billion savings from the repealed regulation. Banco Santander bought Sovereign Bancorp and is expected to see a $2 billion savings from the change in the law.

By one account, this questionable regulatory action will cost taxpayers as much as $140 billion in lost tax revenues. Unfortunately, the floodgates have been opened and to disallow the tax breaks granted to these companies in the current economic climate would ensure a possible meltdown in the capital markets.  Somehow, hearing Treasury Secretary Paulson announcing to the public that “we made a mistake and the repealed tax rule will now go back into effect. Wells Fargo, you now owe us $5 billion in taxes,” sounds like financial suicide even to the economic anarchists amongst us.

The Means Justify the Ends

I am reminded of an interview I heard on National Public Radio shortly after 9/11. Interviewed by Diane Rehm, Lynn Chaney, the wife of Vice President Chaney made the argument that the use of torture was justified as a means to an end – the protection of America – regardless of it illegality under the Constitution. The trumpets of corruption blare as the anthem for all subsequent deregulation, refusal to enforce laws and convoluted interpretation of the law that have been the hallmarks of this administration.

Undoubtedly the Treasury officials responsible for this fraud believe that the means justified the ends. However, when the rule of law gets tossed out the window, far greater risk is imposed on the American system of government, which is in tatters from its many years of manipulation by the Administration and its friends in high places.

Of course, we are now learning today that this shadow governance is not limited to the financial world. In today’s papers, it’s reported that George Bush’s Defense Secretary, Donald Rumsfeld issued a secret memo that authorized incursions into other countries to pursue terrorists.

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The Wall Street bailout legislation, formally known as the Emergency Economic Stabilization Act of 2008, includes limits on compensation for executives of companies receiving taxpayer support.  So what does this mean for taxpayers who are footing the bill?

Not much.

Unfortunately, as drafted the provisions are practically meaningless and will do little to limit the gross payouts already available for these executives. Section 111 of the Act only restricts compensation paid to the top five executives at these companies. In addition, it provides for the recovery, or “claw back,” of ill gotten compensation, that is, performance pay received based upon materially inaccurate financial information.

The “big” provision that has both Republicans and Democrats squealing to their constituents is the provision in the Act that bans payments of “golden parachutes.” These are executive severance agreements that usually pay executives when there is some sort of change in control in the company or, as is often the case, when the executive is fired.  This later provision only applies as long as the federal government holds an equity or debt position in the company.

As noted in last week’s Wall Street Journal, the stakes are significant. The paper reported that executives of financial institutions receiving federal assistance are owed more than $40 billion for past years’ pay and pensions.  Deferred compensation coming due includes $11.8 billion at Goldman Sachs Group Inc., $8.5 billion at J.P. Morgan Chase & Co., and $10 billion at Morgan Stanley.

Since most of these firms haven’t set aside the cash required, they are a drag on current earnings and will be paid out of the corporate coffers.

The liabilities are an essentially a hidden obligation. Even when the debts to their executives total in the billions, most companies lump them into “other liabilities” and only a few of the companies identify amounts attributable to deferred pay.

In today’s Financial Times, it was noted that these Wall Street firms have promised not to use public support to pay these executives’ bonuses.  Bank of America, Bank of New York, Citigroup, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, State Street and Wells Fargo all promised to pay salaries and bonuses from existing cash resources.

So lets walk through this scenario and look at the situation at Morgan Stanley.

The company received a capital infusion of $10 billion from the federal government. They stick their newfound money in their corporate pocket (this is a really big pocket by the way) along with their other cash reserves. Let’s say that tomorrow is “bonus day” at the company.  Colm Kelleher, Morgan Stanley’s Chief Financial Officer reaches deep into the company “pocket” and pulls out $21,015,689, which he intends to use to pay himself (this is the total compensation that Mr. Kelleher received in 2007 according to company filings).

“Ooops! That looks like “government” money. Back in it goes,” he muses. Digging around for “loose change,” he eventually finds some “corporate” money and marches off to his bank in the Hamptons where he can console himself over the terrible financial crisis facing America.  This shell game would be laughable if it weren’t our money!

Meanwhile, our leaders in Congress are calling on the government to tighten restrictions on executive pay for these institutions receiving our money. House Speaker Nancy Pelosi and Senate Leader Harry Reid are wringing their hands with concern.  If their last attempt at reining in executive compensation is any measure, we shouldn’t expect real reform anytime soon.

The task of holding corporations responsible for grossly excessive executive pay falls squarely on shareholders. The only problem is that, in years past, the Securities and Exchange Commission has prevented shareholders from raising compensation issues in the form of shareholder resolutions, arguing that such matters constitute “ordinary business” that is exempt from proper shareholder consideration. Let’s hope that, given the massive public policy issues raised by using public funds for executive compensation, the SEC will reconsider its policy in regard to this important matter.

Stay tuned.

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