When the rules don’t fit Wall Street

( – promoted by buhdydharma )

  You might have heard about how Washington is going to crack down on Wall Street banks. It was something about regulations and Fat Cats.

  Yet if you look at what is going on today, you would come to the exact opposite conclusion.

 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.

 I bet you were starting to worry about the TARP banks, and if they could still afford to give out multi-million dollar bonuses to their executives. I know I was. Thanks to an IRS rules change, they still can.

 The IRS, an arm of the Treasury Department, has changed a number of rules during the financial crisis to reduce the tax burden on financial firms. The rule changed Friday also was altered last fall by the Bush administration to encourage mergers, letting Wells Fargo cut billions of dollars from its tax bill by buying the ailing Wachovia.

  “The government is consciously forfeiting future tax revenues. It’s another form of assistance, maybe not as obvious as direct assistance but certainly another form,” said Robert Willens, an expert on tax accounting who runs a firm of the same name. “I’ve been doing taxes for almost 40 years, and I’ve never seen anything like this, where the IRS and Treasury acted unilaterally on so many fronts.”

 But wait! All this extra assistance from the Timothy Geithner-led Treasury Department won’t help those poor Wall Street bank CEO’s and their bonuses if they can’t book actual profits.

  Never fear! Our brave federal regulators will help them with that too.

 The board of directors at the Federal Deposit Insurance Corp. on Wednesday finalized a new capital rule that addresses industry concerns raised by Financial Accounting Standards (FAS) 166 and 167. FAS 166 and 167, which take effect in January, will require financial institutions to bring certain securitized assets onto balance sheets.

…

  Lowell notes that proposed RBC rules asked for industry feedback on the possibility of capital relief in the form of phasing in the requirements. Given the magnitude of potential new capital needed, commenters requested a six month moratorium on application of the rule followed by a three-year phase in period.

 The purpose of FAS 166 and 167 is to make banks bring off-balance sheet assets on-balance. As it currently stands, the Wall Street banks have hundreds of billions of dollars in underwater assets sitting off-balance. Citi alone has $154 Billion in assets that would be effected by these accounting rules.

   The assets are priced “mark-to-model”, which means their price has nothing to do with the market value of the asset, but are instead priced according to a mathematical model. This has enabled the bank executives to pay themselves bonuses on “profits” that have nothing to do with how the markets are pricing their assets.

  Thanks to our brave regulators, you no longer have to worry if Wall Street bank executives will be able to buy that extra tropical island. Merry Christmas.

[Update]

  It seems the Treasury ran into a small problem today regarding Citi.

  The U.S. government abruptly shelved plans to start trimming its 34% stake in Citigroup Inc., after investors demanded a price so low that the Treasury Department would have lost hundreds of millions of dollars on the deal.

  The embarrassing reversal came two days after the Treasury said it planned to sell as much as $5 billion of stock in the New York company, as part of Citigroup’s plan to pay back $20 billion in taxpayer aid the troubled bank received last year.

  At the expected sale price of $3.15 a share, the U.S. government would have suffered a loss of 10 cents per share on its 7.7 billion-share stake in Citigroup, or about $770 million.

 Could it be that the Treasury lost a whole bunch of money on the bailouts that it refuses to recognize?

 On a related note, I want to congratulate our lead regulator in the Federal Reserve, Ben Bernanke.

 Ben joins an elite group. Perhaps you remember this same magazine cover from shortly before the Dot-Com crash.