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After Change In Tax Law, Wells Fargo Swoops In
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Losses can be used to shelter income for as long as 20 years. So under the old law, Wells Fargo would have received a maximum benefit of $20 billion in tax protection, and only up to $1 billion each year. Now, the company could shelter from taxation its next $74 billion in profits.
The benefit is available to any bank. But right now, Wells Fargo is the rare bank with profits that might be taxed -- Citigroup, for example, is badly in the red -- because Wells Fargo has pursued an unusually cautious strategy since a 1998 merger made the bank one of the largest in the Western United States.
While Wells Fargo was one of the nation's largest mortgage lenders, and one of the largest subprime lenders, the company avoided the excesses of its rivals, dealing more cautiously with its customers. Wells Fargo also has little presence on Wall Street and largely avoided investments in mortgage-related securities that are damaging other banks.
Regulators were surprised by the Wells Fargo deal and initially issued statements expressing concern. But people familiar with the thinking of the regulators said they were reviewing the situation primarily to determine whether the government had any legal obligation to Citigroup, and that they were not inclined to intervene unless they were required to do so.
For the FDIC in particular, the deal could come as a welcome relief, ending its exposure to Citigroup's future losses. That is particularly important because the FDIC initially estimated Citigroup's losses were unlikely to exceed the $42 billion threshold. Wells Fargo's higher estimate of losses are likely to be imposed on Citigroup even if it prevailed, exposing the FDIC to billions of dollars in losses.
At the same time, the deal could complicate the FDIC's ability to deal with future bank failures by reducing the willingness of banks to bid for failed institutions.
Citigroup propped up Wachovia for a week and now may be left empty-handed.
