Reports reveal that as Treasury Secretary Hank Paulson was working closely with the US Congress to pass the $700 billion TARP bailout, he had literally altered a tax ruling favoring large banks – a change worth $140 billion in taxpayer money. Paulson enacted the new tax rule one day before the House of Representatives passed TARP. Under the new Treasury rule, a large bank buying a smaller distressed bank would be allowed to write off the smaller bank’s losses on their tax filing.
A prime example was the purchase of Wachovia Bank by Wells Fargo. Taking advantage of the treasury rule, Wells Fargo was able to buy Wachovia for $15 billion and claim an estimated $19 billion in tax credits from the losses. In the case of Wells Fargo, the Wachovia acquisition turned out to be a net profit of $4 billion at tax payer expense.
Critics of the measure state that Paulson acted illegally since nowhere does the Treasury have the authority to abrogate tax law much less rewrite it. However, despite having a Democrat-controlled Congress, it is unlikely for Congress to change the treasury rule. Many democrat congressman and senators are amenable to Wall Street lobbyists. Incoming Treasury Secretary Timothy Geitner was evasive in his confirmation hearing about whether he would continue to enforce the Paulson rule.