Apr 17

AIG Illustrates Further Treasury Department Incompetence

Timothy GeithnerEvidence of further incompetence from Timothy Geithner and friends over at the Treasury Department surfaced recently in a report that uncovered a disturbing tax deal flowing from the 2008 $182 billion bailout of AIG and other companies. A tax loophole that under normal circumstances serves the important function of providing a corporation with a mechanism to reduce its tax burden following periods of significant loss was not closed to AIG following negotiations with the Treasury Department in 2008. In fact, the loophole was expanded through a special exemption. The tax mechanism referred to as a tax loss carryforward is part of the tax code at section 382 and it allows a corporation to essentially offset future profits with past net operating losses for a period of seven years in order to reduce its tax liability. Normally corporations that acquire other entities, or are acquired as in AIG’s case, are forbidden from claiming the tax loss carryfroward in order to disincentivise purchases or sales executed for the sole purpose of claiming another companies’ losses.

However, during the turbulent period following the bursting of the housing bubble, sub-prime mortgage debacle, and derivatives crash, Timmy Geithner hatched a plan to allow companies being asked, or asking, to take over troubled or failing companies an exception to an IRS rule amended in 1986 to specifically address the issue in controversy here. In AIG’s case, the exemption served to nullify the ownership change that took place when the United States government purchased a significant stake in the company. As such, AIG, which showed a near $20 billion profit in 2011, but will offset nearly 90% of its tax liability by writing down $17.7 billion.

“It’s an arcane and hard-to-follow way of disguising billion of dollars paid to firms that, for whatever reason, are politically favored,” says J. Mark Ramseyer, a Harvard law professor who wrote a paper on a similar tax treatment given to General Motors when it was taken over. “It’s one thing to announce through TARP that you’re going to give a firm a billion dollars. But if you issue a letter saying that the company can use a net operating loss that they would otherwise lose, that’s harder for people to follow,” he says, referring to the Troubled Asset Relief Program enacted in 2008 by the U.S. government to buy assets and equity from financial institutions to strengthen them. Besides AIG and GM, Citigroup, Fannie Mae, and Freddie Mac got tax breaks as part of their bailouts.

The Treasury Department argues that following nearly $200 billion in bailout cash, that AIG couldn’t make ends meet or attract capital, notwithstanding the obvious message that Treasury was sending to investors through the bailout: That AIG would not be permitted to fail. It is the height of arrogance to ask the American people to believe that attracting private capital would be difficult for a company guaranteed to remain viable by the United States Treasury Department. Yet Treasury continues its sell its pyramid scheme based primarily on the false idea that the entire world would have been eaten by dinosaurs if it did not funnel trillions of dollars to corporations.

“Allowing those companies to keep their NOLs made them stronger businesses, helped attract private capital and further stabilized the overall financial system,” Emily McMahon, the acting assistant secretary for tax policy, wrote in a Treasury blog post March 1. “It would have been counterproductive — and perhaps irresponsible to undermine the stability of those same institutions, at the height of the financial crisis, by imposing a tax code provision that was never intended to apply in this context,” she wrote.

Elizabeth Warren, architect of the Consumer Financial Protection Bureau (CFTC)–an agency many have high hopes will offer significant financial protections to the public–has called the AIG loophole a stealth bailout. It represents much more than that however. It represents more evidence that the Obama administration and the Treasury Department had and has in place a policy of providing any and every resource to corporations that caused the collapse of the world economy, while doing next to nothing to provide assistance to the public. Whether the efforts were conspiratorial in nature is irrelevant, as the ultimate effect is the same: The public retained its debts and losses, while the corporations were provided cash and loans to service their debts and a mechanism to further limit future liability through tax provisions not extended to the American people.

Perhaps lost in all of this is that as a result of this disturbing decisions at Treasury, that executives at AIG and other companies bailed out by the American taxpayer will receive larger bonuses, as their bonuses are tied to overall profitability. Less tax liability equals greater profits. While the Obama administration is fond of pointing out that many of the companies that were bailed our during the crisis have “paid the government back and have returned to profitability,” the bailout of AIG will ultimately cost the American people at least $22 billion. The President failed to remove Timothy Geithner after reports surfaced that he unabashedly failed to follow his directive to break up Citi. We have now learned that he cut private tax deals with AIG and other companies to guarantee limited tax liability for nearly a decade. President Obama’s retention of perhaps the most incompetent Treasury Secretary serving during my lifetime leads me to only one conclusion: That the President either tacitly or directly approved of his decisions.