Senator Seeks Inspector General Review Of Treasury's Bank Merger Move

by Mike Godfrey, Tax-News.com, Washington

18 November 2008

United States Senator Chuck Grassley, ranking member of the Committee on Finance, has asked the Treasury Department inspector general to review the circumstances and any possible conflicts of interest involving the administrative move that gives a tax break to banks that acquire poorly performing banks.

“Treasury’s move took a lot of people by surprise,” Grassley said. “It was a big policy change for an agency to take administratively. Treasury didn’t involve Congress, so there were no checks and balances to vet the policy."

"The relationships of the players involved might give the appearance of conflicts of interest. I’m asking the inspector general to look at Treasury’s move after the fact and make sure the agency was fair, unbiased and above board in its actions," the Iowa Republican added.

Grassley's letter asks Treasury Inspector General Eric M. Thorson to investigate possible conflicts of interest involving Treasury officials, former Goldman Sachs executives, and board members in the sale of Wachovia Corporation to Wells Fargo. The letter noted that Treasury Secretary Henry Paulson was formerly the chairman and chief executive of Goldman Sachs while Edward M. Liddy, a former Goldman Sachs board member, was selected to lead AIG when the Treasury loaned the company the first USD85bn of USD150bn of taxpayer funds. Grassley also expressed concern that Neel Kashkari, head of Treasury’s new Office of Financial Stability, created to oversee the USD700bn of funds authorized by Congress for the banking system bailout, was a former vice-president at Goldman Sachs.

On October 1, the IRS issued Notice 2008-83 allowing banks to take advantage of losses deriving from bad debts or loan write-downs in a change of ownership situation on a much more generous basis than previously. Before the change, treatment of pre-takeover losses followed IRS Notice 2003-65, under which fairly stringent limits applied to the availability of pre-takeover operating losses. Wells Fargo is thought likely to be able to utilize USD23bn of Wachovia's losses over the next three years under the new approach as against a mere USD3bn under the old rules.

"Treasury's action raises significant questions about whether it exceeded implementing authority by attempting to change the law," Grassley's letter stated.

"The facts and circumstances surrounding the issuance of the Notice, particularly as it relates to Wells Fargo’s purchase of Wachovia Corporation, raise concerns about the independence of the decision makers," the letter added.

Last month, Democratic Senator Charles Schumer, a member of the Senate Banking Committee, also wrote to Paulson, and Internal Revenue Service Commissioner Doug Shulman, to enquire why Congress was not consulted on a measure.

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