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Behind Bank of America’s tax break

Marketplace Staff Jan 21, 2008
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Behind Bank of America’s tax break

Marketplace Staff Jan 21, 2008
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TEXT OF INTERVIEW

Scott Jagow: Earlier this month, Bank of America said it was buying the mortgage lender Countrywide. The $4 billion deal will probably save Countrywide from bankruptcy. And Bank of America? Well, it’s getting a gift from Uncle Sam, otherwise known as you and me.

Allan Sloan has been snooping around the deal. Allan, what’s going on?

Allan Sloan: Well, Bank of America gets to use a bunch of loses — a bunch of loses that Countrywide has had, but hasn’t yet shown up on its tax books. It saves Bank of America, by the estimate of the guy I consulted, half a billion dollars of taxes over the first five years, and then God only knows how many more after that.

Jagow: Why is Bank of America getting this tax break?

Sloan: Because of the way the tax laws work. Countrywide has built-in loses that haven’t yet been realized because clearly, you know, the company’s in a lot of trouble, it’s got a lot of loses it hasn’t yet recognized on its books. I guess just before the transaction closes, Countrywide figures out what those loses are and Bank of America gets to use a proportion of them for each year for the first five years, and then gets to use the rest of those loses starting in year six.

Jagow: All right. So as taxpayers, should we be upset about this?

Sloan: Well, I mean, we should be, I guess immune, Scott. I mean, what’s $100 billion a year? I mean, it’s nothing. It’s just that this savings is a margin of safety for Bank of America. If the deal works, it’s nice to have an extra $500 million in cash saved, plus more down the line. And if the deal doesn’t work, at least having some money coming in from the government, at least it mitigates your pain.

Jagow: Well, Bank of America is taking somewhat of a risk here with Countrywide. Maybe this sort of balances that out?

Sloan: Well, it offsets some of it. I mean, if you said to me, you know, buy Countrywide for $4 billion and assuming heaven only knows what liabilities, and in return I’ll give you $100 billion a year for five years — I mean, I wouldn’t take that deal, and neither would Bank of America. I mean, Bank of America figures it can make money on this. This tax thing doesn’t make or unmake the deal, but it’s a nice little hidden bonus. If you think of this as a cake, the tax bills are the icing.

Jagow: All right. Allan Sloan from Fortune Magazine, thanks for digging on this.

Sloan: Any time, Scott, you’re welcome.

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