In just a couple months, I must have read well more than 100 newspaper articles on the financial collapse and the federal response to it. But none is more remarkable than Amit Paley’s story in last Monday’s Washington Post. (Apologies for posting late; I just got around to reading it.) The story concerns an obscure change in the U.S. Tax Code that was forced through by the U.S. Treasury Department without any public review or Congressional involvement, a change that will grant an estimated $25 billion in tax savings to Wells Fargo and deprive the federal government of somewhere between $105 and $140 billion in revenue. Warning flags are everywhere: The change was announced with no fanfare within 24 hours after the House voted down the first bailout bill. Treasury acted without clear legal authority. And finally, the change has long been a pet cause of conservative economists. “I’ve been in tax law for 20 years, and I’ve never seen anything like this,” says one lawyer quoted in the article.
I don’t have the expertise to judge the merits of the change. Maybe this was needed lest the economy fall further into an abyss. Maybe the Wells Fargo-Wachovia merger would have never happened without the change, costing taxpayers far more. Maybe there is a rationale for all other banks from here to eternity (even after the crisis ends) to enjoy this tax break. But as Paley makes clear, no one in the Treasury has yet to make this case in public. (There was an off-the-record call with dumbfounded Congressional staff.) This is a grave concern. Our system only works when major decisions are being made in sunlight, with significant debate, and that has not happened. Paley quotes a tax attorney, who notes an ominous parallel.
“It’s just like after September 11. Back then no one wanted to be seen as not patriotic, and now no one wants to be seen as not doing all they can to save the financial system,” said Lee A. Sheppard, a tax attorney who is a contributing editor at the trade publication Tax Analysts. “We’re left now with congressional Democrats that have spines like overcooked spaghetti. So who is going to stop the Treasury secretary from doing whatever he wants?”
On Friday, Republican Sen. Charles Grassley, an Iowan who has established himself as one of the great legislative investigators of waste and corruption in our nation’s history, called for an investigation of the change. (New York Democrat Charles Schumer is also concerned.) Grassley writes that he is particularly worried about possible conflicts of interest at the Treasury Department. “Treasury didn’t involve Congress, so there were no checks and balances to vet the policy. The relationships of the players involved might give the appearance of conflicts of interest. I’m asking the inspector general to look at Treasury’s move after the fact and make sure the agency was fair, unbiased and above board in its actions,” he said in a press release. From his letter to the inspector general:
The facts and circumstances surrounding the issuance of the Notice, particularly as it relates to Wells Fargo’s purchase of Wachovia Corporation, raise concerns about the independence of the decision makers. Since the Notice and the FDIC’s intervention are part of the federal government’s larger efforts to stabilize the economy, I ask that your office conduct this investigation since you have broader jurisdiction over Treasury than the Treasury Inspector General for Tax Administration. As part of your investigation, please obtain and review all documents and communication related to the issuance of Notice 2008-83, including all records of communication between Treasury officials, individuals at Wells Fargo, and/or Wachovia Corporation or their representatives.
Sounds to me like a good first step.
UPDATE: For more information on this, here is an earlier story about how the Section 382 change impacted the Wells Fargo-Wachovia merger, by Binyamin Applebaum of the Washington Post.