Yet more good news out of Washington this week (I speak ironically, of course). The Washington Post reports today (U.S. gave up billions in tax money in deal for Citigroup's bailout repayment) that Citigroup will retain its tax exemption on losses carried forward once the government exits the company.
Binyamin Appelbaum writes:
The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors.
While the Obama administration has said taxpayers are likely to profit from the sale of the Citigroup shares, accounting experts said the lost tax revenue could easily outstrip those profits.
The news gets better: a photo caption in the same article reads that Citigroup incurred $ 38 billion in losses. The change in the IRS ruling allows Citigroup to claim $ 38 billion as a tax exemption against future profits.
So let’s get this straight:
• Citigroup was saved thanks to a $ 45 billion government bail-out, of which $ 25 billion was converted to equity (which is now being sold);
• Citigroup additionally received a $ 306 billion government asset guarantee;
• Citigroup has been making obscene profits from the $ 1 trillion in low-interest "quantitative easing" credit window from the Fed at an interest rate between 0.25%-0.50%, as well as the Fed's purchased of mortgage-backed securities;
• Citigroup now get a further $ 38 billion tax exemption from losses carried forward.
The irony is why this should be happening. There is no objective hurry for the government to exit Citigroup and thus forsake a fair compensation for its role in saving the company. The reason is buried a little further down in Appelbaum’s article:
The banks say the strings attached to the bailout, including limits on executive compensation, have restricted their ability to compete and return to health. Executives also have chafed under the stigma of living on the federal dole. President Obama chided bankers at the White House on Monday for not trying hard enough to make small-business loans.
The Obama administration also is eager to wind down a program that has become one of its largest political liabilities. Officials defend the program as necessary and effective, but the president has acknowledged that the bailout is "wildly unpopular" and officials have been at pains to say they do not enjoy helping banks.
So if I read this correctly, the reason the government is granting the tax loss is due to two reasons:
a. So Citigroup can pay higher bonuses to its incompetent bankers, who caused this mess in the first place, and
b. So Barack Obama's popularity ratings can improve?
I’m amazed there has been no further reaction from the American public. Although I would like to express on this blog exactly how I, personally, feel about this, my professional obligations and basic courtesy preclude me from doing so.
All I can safely say is that this appears to be an obscene give-away. What US individual taxpayer has ever been allowed to carry forward a $ 38 billion tax exemption for losses?
The only way this transaction will make Obama more popular is if people don’t understand what’s going on, or forget what happened by mid-term elections next year. I don't believe either of these events is going to happen: people do understand what is going on, even if they don't understand all the details, and people will react in the next elections.
Some questions to consider:
• Do we now really believe there has been no quid quo pro for the massive amounts of electoral contributions the financial sector gave the Obama campaign last summer?
• Do we now really believe that financial sector regulation is going to work?
• Should we claim to be surprised if the “average American” outside the Beltway is furious with the Obama Administration and Wall Street?
A while ago, I wrote about how much money I could make running a customer-focussed bank in Greece. I think I'm going to work at Citigroup instead. Communism never had it this good.