An Interesting Perspective on Subprime "Bailouts"

[Porsche-O-Phile]

And infuriating. . .


http://money.cnn.com/2008/01/11/news/companies/sloan_countrywide.fortune/index.htm?cnn=yes


BofA's awesome Countrywide tax break

Brace yourselves, taxpayers of America. You're going to help Bank of America finance its $4 billion buyout of Countrywide.
By Allan Sloan, senior editor at large


NEW YORK (Fortune) -- Guess who's helping Bank of America pay for its $4.1 billion purchase of Countrywide Financial? Answer: The taxpayers of the United States.

That's because Bank of America (BAC, Fortune 500), which is solidly profitable, will be able to use some of Countrywide's losses to offset its own taxable income. The tax break could total about half a billion dollars over the first five years, according to an estimate by tax guru Robert Willens, who left Lehman Brothers Friday after a 20-year run and will be in business as Robert Willens LLC starting next week. The losses could be worth considerably more to Bank of America starting in the sixth year, depending on how big Countrywide's losses are when Bank of America formally acquires it.

At this point, of course, no one knows how much in losses Countrywide has run up since the junk mortgage market began souring and defaults accelerated. Countrywide (CFC, Fortune 500) itself probably doesn't know. But it seems almost certain to ultimately be in the billions.

In tax circles, Bank of America is famous for its 1988 purchase of the failed FirstRepublic Bank of Dallas, which was being auctioned off by federal regulators. Bank of America, then known as NCNB Corp., the parent of North Carolina National Bank, discovered a way to structure the deal to save $1 billion of taxes, using a convoluted strategy that none of the other bidders knew about. That allowed NCNB to outbid its rivals for the bank, and still come out way ahead.

The Countrywide tax break isn't in that league, but it would still be worth a lot of money. Willens estimates that Bank of America will be able to deduct $270 million of Countrywide's losses annually for the first five years it owns the firm.

That's based on a $6 billion purchase price - $4 billion to Countrywide's common stockholders, plus the $2 billion of preferred stock that Countrywide sold to Bank of America in August. Willens says that you multiply that $6 billion by 4.49 percent - the so-called "long-term tax-exempt rate" - to calculate how much of Countrywide's losses Bank of America can deduct annually for five years after the purchase.

A $270 million annual deduction would save Bank of America something more than $100 million a year in federal and state income taxes. The long-term tax-exemption changes slightly each year, Willens says, but is unlikely to change much. When I asked how it's calculated, Willens, a master of tax arcana, threw up his hands. (Metaphorically, of course.) "It's like the formula for Coca-Cola," he said, "no one outside the circle knows it" and it's so complicated that, "no one else wants to find out."

So over the first five years, Bank of America can use a total of $1.35 billion of Countrywide's losses to shelter its income. (That's five years of $270 million annual losses.) If Countrywide's embedded losses when Bank of America buys it exceed $1.35 billion, Willens says, the bank will be able to deduct the rest of the losses, without limit, starting in the sixth year.

Isn't life fun?

[Rick Lee]

Looks like someone at BofA will be getting a good bonus for figuring this one out.

Still, because they want to give credit cards to illegals, I would never do business with them.

[Porsche-O-Phile]

Agreed.

[Steve Carlton]

Well, at least this is better than Countrywide going under.

[Rick Lee]

Sometimes I wish Countrywide would go under just so I'd stop receiving so much mail from them. They aren't even my servicer now.

[Porsche-O-Phile]

Better?

For who? Not the taxpayers apparently.

Seems to me Countrywide was one of the worst offenders by constantly promulgating the culture of "liar loans" and other subprime junk. There used to be a running joke that if you couldn't get financed anywhere else, "there's always Countrywide!"

I don't know about you guys closer to the industry, but everyone I spoke with treated them as kind of the "D-grade" credit card company (you know the ones that "offer" 29.9% APRs?) of the mortgage industry. . .

[onewhippedpuppy]

I think the government bailouts are total BS, but how is this a bailout? Adding a sizable loss to your balance sheet will save you in taxes, that's nothing new. Business is business.

[Moneyguy1]

Back in the 90s, back east when Kathryn and I were still peddling dwellings, we used Countrywide quite a bit. They were a rather staid and conventional company back than.

Greed will kill you.

[Steve Carlton]

If BofA didn't purchase Countrywide, Countrywide would still have the deductible loss. Somehow I got to believe the taxpayers would come out worse if Countrywide went under. I'm sure it would damage the economy as a whole as well.

[Porsche-O-Phile]

I think what it's really saying is that either directly or indirectly, the taxpayer is going to end up eating this. I don't necessarily disagree with that. If B of A gets to write off a huge amount of loss, do you think the gubmint is just going to say "gee whiz, I guess our revenues will just have to be down for this year"?

More like they'll raise taxes elsewhere on unrelated entities/individuals (us) or "borrow" it by just lumping it into the federal deficit and/or just printing more dough to cover it, which means our children will ultimately need to pay for it all and/or it further devalues the dollar.

[Seric]

Originally Posted by Rick Lee

Sometimes I wish Countrywide would go under just so I'd stop receiving so much mail from them. They aren't even my servicer now.

You too? I never run out of firestarter that's for sure.

[onewhippedpuppy]

Jeff, you could make the same case for anyone who maximizes their tax deductions. Or businesses that buy equipment every December to offset net income. This is just on a larger scale.

[Porsche-O-Phile]

You do have a point there. . . I guess it's just another example of the government rewarding stupidity. And another very good argument for the FairTax proposal (or something similar).

[jyl]

$100MM year in tax savings is pocket change for BAC, about 1/2 of 1% of its L12M net income of $20BN.

BAC spent appx $2BN to buy shares of CFC at $18, CFC stock went to below $5. If BAC really wanted tax savings, they could have simply let CFC go bankrupt and written off that $2BN.

In buying CFC, BAC is making a big bet, possibly throwing good money after bad. Who knows how much more money they will have to invest to keep CFC afloat? The deal is certainly not being done for tax reasons.

[onewhippedpuppy]

Flat tax? You have my vote.

[jyl]

Sure, under FairTax, BAC would pay no federal tax at all - zero. While consumer pay their 30% national sales tax (maybe 40%, if you want it to be revenue neutral). Sounds good?

Originally Posted by Porsche-O-Phile

You do have a point there. . . I guess it's just another example of the government rewarding stupidity. And another very good argument for the FairTax proposal (or something similar).

[turbo6bar]

Originally Posted by jyl

In buying CFC, BAC is making a big bet, possibly throwing good money after bad. Who knows how much more money they will have to invest to keep CFC afloat? The deal is certainly not being done for tax reasons.

That idea is being thrown around liberally on financial blogs. BAC could be making a great investment, or they could be buying pure crap.

Everything I've read indicates CFC is still on shaky ground. It's hard to justify buying an asset with an unstable foundation, but what do I know? I'm still mildly bearish on housing.

[Rick Lee]

It doesn't matter how much CFC or BAC write off. Corporations don't really pay taxes. They collect them from consumers by building them into the price of their products and services and then pass them back to the gov't. They are merely a tax collector. Always drives me nuts to hear politicians say they're gonna finance this or that project - road, bridge, football stadium - with a new business tax. Consumers think it doesn't affect them, but they are the ones who pay it.

[Aurel]

I did not get the part where taxpayers would be financing Bank of America. Whenever people whine about taxpayers funding this or that, they always forget that companies pay taxes too. So, if I understood the article well, the author says that because BOA would be getting a $270M taxbreak/yr for acquiring Countrywide, the taxpayers must come up with that money???
If I apply the same reasoning, I got a bigger mortgage, so bigger tax deductions. Does it mean that other taxpayers must come up with the money because I paid less taxes? I don`t think so.

Aurel

[Rick Lee]

Originally Posted by Aurel

If I apply the same reasoning, I got a bigger mortgage, so bigger tax deductions. Does it mean that other taxpayers must come up with the money because I paid less taxes? I don`t think so.

Actually, yes. Renters do subsidize homeowners exactly because of this. And childless adults subsidize parents for the same reason.