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Archive for March 29th, 2010
Two Top Banks Likely To Be Spared From Federal Taxes
March 29th, 2010 | 
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Two Top Banks Likely To Be Spared From Federal Taxes
By CHRISTINA REXRODE
MCCLATCHY NEWSPAPERS
CHARLOTTE, N.C. — This tax season will be kind to Bank of America and Wells Fargo: It appears that neither bank will have to pay federal income taxes for 2009.
Bank of America probably won’t pay federal taxes because it lost money in the U.S. for the year. Wells Fargo was profitable, but can write down its tax bill because of losses at Wachovia, which it rescued from a near collapse.
The idea of the country’s No. 1 and No. 4 banks not paying federal income taxes may be anathema to millions of Americans who are grumbling as they fill out their own tax forms this month. But tax experts say the banks’ situation is hardly unique.
“Oh, yeah, this happens all the time,” said Robert Willens, an expert on tax accounting who runs a New York firm with the same name. “Especially now, with companies suffering such severe losses.”
Bob McIntyre, at Citizens for Tax Justice, said he opposes the government giving corporations such a break.
“If you go out and try to make money and you don’t do it, why should the government pay you for your losses?” McIntyre said. “It’s as simple as that.”
For 2009, Bank of America netted a $2.3 billion benefit related to income taxes, according to its annual report: It had a benefit of $3.6 billion from the federal government, and an expense of $1.3 billion that it paid to different state and foreign governments.
It’s not unusual for a company’s debt to the federal government to vary widely from its debt to state governments, as appears to be the case with Bank of America, said Douglas Shackelford, a tax professor at University of North Carolina-Chapel Hill.
Confidential returns
The federal government often offers more tax deductions than the states; for example, Bank of America wrote down its federal taxable income with credits from low-income housing and losses on foreign subsidiary stock.
Company tax returns aren’t public, so it’s difficult to say for certain how much a company pays to, or receives from, tax coffers in any year.
The bank’s $3.6 billion current federal tax benefit for 2009 came in a year when it lost $1 billion in the U.S., according to its latest annual report. For the previous year, when the bank had profits of $3.3 billion in the U.S., it listed a current federal tax expense of $5.1 billion.
Wells Fargo was profitable in 2009, with $8 billion in earnings applicable to common shareholders. But its tax payments were reduced because of Wachovia’s losses.
Wells netted an overall tax benefit of $4.1 billion in 2009. It got a benefit worth nearly $4 billion from the federal government, and another worth $334 million from state governments. It had an expense of $164 million in foreign taxes. Wells did record an overall income tax expense of $5.3 billion, but that was offset by the tax benefits of the Wachovia losses.
The topic of corporate tax breaks has gained buzz recently because of a provision in the 2009 stimulus bill, which allows companies to “carry back” their losses for 2008 and 2009 to the previous five years, instead of just the previous two years. Homebuilders and other industries that suffered big losses in 2008 and 2009, but made a lot of money in the years before that, stand to gain billions in refunds. However, the stimulus bill provision does not apply for Bank of America and Wells Fargo, because companies that received TARP loans are ineligible.
‘Arbitrary’ time period
UNC’s Shackelford said the argument for carrybacks stems from the belief that it’s “arbitrary” that taxes are collected on an annual basis.
“There’s no reason we couldn’t collect them on a monthly basis or a two-year basis. Then your losses and gains would be offset over the period,” he said. “The carryback enables you to not be penalized because your losses got bunched in a different year from your gains.”
Help from Congress
The stimulus bill provision, he said, was helped by business lobbying. “There’s an awful lot of companies that paid a lot of taxes in the 2004 period, then they lost a lot of money, and they went to their legislators and said, ‘Please help us,’?” Shackelford said.
McIntyre, at Citizens for Tax Justice, co-authored a report in 2004 related to carrybacks, after the Bush administration expanded many corporate tax breaks. The report examined 275 of the country’s largest companies and found that nearly one-third paid no federal income taxes in at least one year from 2001 to 2003. The companies overall were profitable in those years, but took advantage of tax breaks.
“If you or I lose money in the stock market, we don’t get to carry back our losses to any significant degree,” said McIntyre. His group works on closing tax breaks for corporations.
“Getting a refund from the past, that’s just weird,” he added.
Posted in Bank of America, Banks, Economic Crisis, Economy, Financial System, Taxpayer, Wells Fargo | 
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What's On The Worry List?
Today’s Breakfast with Dave is a long one, easily packing three days of work in a 19 page PDF as Rosenberg will not be writing the next two days. Here is a snip from Rosenberg called What’s On The Worry List?
• Last week’s bond auctions did not go well. It seems that Japan and China did not show much interest. The lack of bids was no better underscored than in the 7-year Treasury note auction where the median yield was 3.29% versus 3.05% a month earlier. April is a cruel month for the U.S. Treasury market, with 10-year yields rising in each of the past 4 Aprils and in 6 of the past 7, and by an average of 25 basis points.
• That, in turn, could spook the equity market since another 25bps of upside pressure could then generate a fund-flow spiral as was the case in the summer of 2007 — 3.85% (where we are now) ostensibly is a trigger point for selling of mortgage bonds. As rates rise, homeowners are less likely to pay their mortgages early, which extends the life of the mortgage and that in turn encourages mortgage investors to neutralize the duration of their portfolios by selling T-bonds and notes. We have seen this happen before and while it will likely provide a nice buying opportunity given the deflationary headwinds the economy now faces, the prospect of a spasm in the Treasury market is worth considering. Every equity market correction in the past — 1987, 1994, 1998, 2000, and 2007 — was preceded by what turned out to be a brief but significant runup in yields. See Stock Rally at Mercy of Rising Rates on page C1 of today’s WSJ). And, the more overvalued the equity market is, the more the downside risks if bonds begin to provide greater yield competition in the near-term. Jeffery Hirsch over at the Stock Trader’s Almanac is in today’s NYT predicting a 20-30% correction ahead (see Stocks Soar, But Many Ask Why on page B1) — he notes the modest number of stocks hitting new 52-week highs with every new interim peak being reached by the overall market.
• The leading indicators are all pointing to a slowdown, and this could show up in a critical data-release week in mid-April with retail sales on the 14th, industrial production on the 15th, and housing starts, as well as consumer sentiment, on the 16th. The broad money supply measures are contracting again as the Fed is no longer boosting its balance sheet at a time when both the money multiplier and money velocity are showing no signs of turning higher.
• Greece will be put to the test in April when €15 billion of bonds have to be rolled over (through the end of May).
• The Fed ceases to buy mortgage securities on Wednesday and this is happening at a time when mortgage rates have already climbed back above 5% and the housing market is showing signs of rolling over again. See Spike in Treasury Yields Jolts Mortgages on page C2 of today’s WSJ. There is also pressure from within the Fed (Plosser the latest) to soon begin to sell securities outright. One thing that is very likely on its way again is another 50bps hike on the discount rate — has anyone noticed the TED spread beginning to widen ahead of this? The banks, going forward, will not have easy access to the window and will have to rely on each other for funding.
• April 15 looms as a critical day from a geopolitical standpoint. It is the day that the Treasury Department will issue its report concluding whether or not China is a currency manipulator. If it is viewed as such then trade sanctions are likely to ensue and very likely some bilateral tensions. This could be very good news for the bullion market (as well as the Bloomberg News report today stating that gold imports in India are surging right now — up six-fold from a year ago — as there are an expected 1 million marriages planned for April and May). Sentiment is so negative on the U.S. Treasury market it’s not even funny. Everyone seems to focus strictly on supply without realizing that the only way to predict a price is by forecasting both supply and demand
• Speaking of geopolitical risks, President Obama has allowed U.S. relations with Israel to deteriorate to such an extent, and is handling the Iran nuclear situation with such a kid-gloves approach, that disturbing columns like this are now popping up in newspapers like the NYT (Rift Exposes Larger Split In Views On Mideast — page A4), the National Post (Iran Preparing to Build Two More Secret Nuclear Sites in Mountains, Experts Say — page A8), and the WSJ (How the Next Middle East War Could Start — page A23). Even the prospect is enough to underpin the energy stocks, which are currently priced for $69/bbl on WTI.
Fear Of Missing More Rally
Although that is an impressive looking worry list, it is important to understand those are things that very few are really worried about.
For example, with mutual fund cash levels at all time record lows, it is difficult to place any credence in the widespread thesis “the market is climbing a wall of worry”.
Indeed, there is no general worry, unless you mean fear of missing more of the rally in equities. The only other widespread worry is fear of massive inflation or fear the dollar will collapse. From where I sit, neither seems very likely.
For all this talk about worries, the one thing not on anyone’s worry list is a huge market decline and the distinct possibility the market bottom is not even in. No one is worried about that. However, they should be.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Posted in Debt, Economic Crisis, Economy, Money, Stock Market, Treasury bond sales |
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Bears Are Dead Wrong? Hmmm….
Bears Are Dead Wrong? Hmmm….
Posted by Karl Denninger
Yahoo has jumped the shark with publishing “1,300″ on the S&P by the end of the year, a 17% annual increase:
“The bears have been consistently wrong throughout this whole rally,” Altucher tells Aaron in the accompanying clip. “If you followed the bears’ advice at the bottom you’d be dead broke right now.” For full disclosure, Altucher did not call the market crash in 2008. “Better to be consistently bullish than consistently bearish.”
Well now that’s math: 70% of the time the market is ascending, historically.
The problem is that when it declines it almost always goes down much faster than it goes up, and due to that pesky math again if you lose 50% you must get a clean double to be “back to even.”
Someone better look at the 1930s. We had the same sort of calls then – and there was a ferocious rally fueled in no small part by people who were convinced that 1929 was just a “garden-variety panic.”
They were wrong. When the market rolled over for the second time instead of collapsing in a spectacular crash it instead ground lower for years, and in fact we did not see a secular bull market again until the 1950s – following a World War! Worse, while the market did make its “low” in 1932, it still doled out a 50% loss from 1937 to 1942, as you can see here:
The question, of course, is “where are we now”? From today’s charts you can make a number of arguments but “correlation” is going to be missing in all of them. Indeed, going back through the entire range on this chart I can’t find a pattern that looks like this – so those who claim “we have a good fit” are trying to fit a thesis to a chart, rather than finding the chart fit first and then extrapolating.
I can make a fairly clean argument that this is a head and shoulders pattern in development. A fall below ~6,000 in the DOW would confirm this, although such a fall might not come for as many as five years (if the chart is symmetrical.)
By the way, should that happen the downside target is, effectively, zero (14,000 – 7,000 neckline, approximately = 7,000 points down for the target!)
Is that extreme? Sure is. But the S&P 500 looks an awful lot like a double top, and the target on that, if it is, happens to be a full retrace of the move that led to the double top. Being generous this puts the long-term target at 400, being “aggressive” puts the view more in line with 1988, which is roughly half that. Now you know where my “SPX 210.23″ came from that’s in the header of The Market Ticker.
You could call that sort of view catastrophically bearish, of course.
Or you could call it realistic.
To call it catastrophically bearish (that is, ridiculous) you have to make the argument that a burst credit bubble can be re-inflated via some means. I would like to see someone show me where this has been successfully accomplished in the modern world. Certainly Japan has tried, yet with 20 years of effort they remain nearly 75% off their stock market’s all-time high.
Japan couldn’t make it happen – why do you believe we can?
Dave Rosenberg makes the same set of essential points in a piece that Zerohedge linked up today. And certainly, this rally has been good to you if you bought the bottom – instead of being paralyzed in fear. Many people (myself included) did, but sold out far too soon – we did not believe that the balance-sheet fraud among banks could carry us this far. We were wrong. That’s ok – nobody ever goes broke taking a profit, even if you leave half of it on the table.
Mr. Rosenberg makes the argument that the rally has been essentially fueled by the prop desks selling back and forth to each other and acting like geniuses. Maybe. What we do know is that institutional mutual funds are back to 3-1/2% cash positions – where they were in October of 2007. We do, of course, know what came next.
What we do know is that there are simply no sellers. Absent sellers prices tend to drift upward. That’s ok, for how ever long it lasts. It is the “how ever long it lasts” problem, however, that eventually comes home to roost, as those prop desks can short just as quickly as they can buy.
More troubling as Dave has picked up on is the fact that ex-government handouts personal income is contracting and now has for two months in a row. NBER uses this indication (as do I) for a real read on whether we are in an economic contraction or expansion. It is, in my view, much more accurate than the so-called GDP, which is influenced by trade imbalance and inventory cycles – neither of which have a thing to do with organic final demand.
This Friday we will be treated to the Non-Farm Payroll report where the only people trading it will be the Globex (electronic) futures players. That promises to be a wild ride, and one that I will sit out on purpose. Surprises either side of consensus are likely to be poorly received – a “hot” (good) number will probably spike yields higher, which is what produced the two late-day sell-offs last week. A “cold” (poor) number likely hammers yields, but at the same time hammers stocks, as it leads to questions about whether the so-called “recovery” we’ve been promised is in fact real. So like Goldilocks, we need a “just right” figure (in the eyes of the market, not necessarily the so-called “consensus”) for the market to treat this release with benign neglect.
Key to this release will be the “ex-Census” figures, since Census jobs are both part-time, of limited duration and relatively-low-paying. As such everyone doing analysis on the number (myself included) will be backing that out to the best of our ability; one hopes that we get a clean delineation from the BLS so our efforts are not “a guess.”
The risks in the back half of the year are quite a bit more serious. To begin with those census jobs will be finished, and those employees will get pink slips. This will impact the NFP number in the back half of the year. Housing appears to have sputtered despite all the tax credits and distortions and at the same time The Fed is finishing their purchases of MBS (which have artificially suppressed rates); this portends more softness in housing, perhaps a lot of it.
The bottom line on housing, which is underlying this entire mess, is that it is still too damn expensive.
Like many Chicago-area residents who’ve lost their homes to foreclosure, Alondra Navarette had nowhere to turn when forced to leave her spacious house earlier this year.
The struggling maid could no longer afford her ballooning mortgage payments when house-cleaning jobs dried up. So she moved into the already cramped basement apartment occupied by her daughter and a roommate on Chicago’s Northwest Side.
Government hacks always prattle on about “affordable housing”, but none want to talk about why houses are so damn expensive – it is the deliberate actions of government, which have protected banks who lent far more than these homes are realistically worth, that prevents homes from being affordable!
Is there any hope for this to change? Not so far. The banksters are more important than those of modest means, and the consequences become increasingly severe the longer these outrageous and destructive policies are maintained.
Then you have small business – the engine of job creation and economic advancement in this country. There’s no joy to be found there:
After some upward trends for most of last summer and into the fall, Discover’s monthly check on the pulse of small business owners measured 75.7 in March, down 9.2 points from February and back to the levels of a year ago.
“We’ve seen bigger month-to-month drops, but there is clearly a pattern here: Small business owners don’t like what they’re seeing – both at home and in the larger economy – and they’re responding by pulling back, rather than just holding the line,” said Ryan Scully, director of Discover’s business credit card, who commissions the monthly survey. “Tax season could be having an effect on the overall mood, especially because they’re still not seeing any relief from the government.”
So much for “recovery” among the engine of job growth.
We have a radical divergence between the stock market and opinions in the real world. Who’s right? In the end, the real world always wins, but timing is a problem – manias always go further than you think they possibly can, and this one has been and will be no exception to that rule.
I still need to see real improvement in the leading indicators I follow, and so far, it simply isn’t there. I don’t use “stock prices” as part of my data set for business conditions either – if I had, I would have been catastrophically wrong in 1999, 2007 and 2009! Rather I focus on consumer and small business confidence, sales tax numbers from the states and internals from the household survey in the employment report. Of those only one – the internals of the NFP report – and only for one month, last month – has show encouragement, and one month does not a trend make.
Small business and consumer confidence have not put in the sort of forward expectation numbers that tell us people believe they will both hire and be hired, and thus be able to spend freely. Leverage in the consumer space is still too high, as measured by the HOPE DTI numbers – instead of forcing those who are in fact bankrupt to recognize it and clear their debts (which would also bankrupt the banks that imprudently loaned these people money) we have chosen instead to paper over insolvency with fraudulent accounting.
This, however, doesn’t change the overburdened consumer’s mood nor does it help their long term spending power. It can (and has) provided a temporary, short-term support to spending, as the government has come in with direct and indirect subsidy. But this cannot last forever, and without actual economic activity in the private sector the odds rise precipitously of a ruinously bad “double dip”, destroying those people who jumped back in “chasing” this market higher – especially if you were late to the party, as most individual investors were and are.
Be careful.
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