Losses today become tax benefits tomorrow, and with an eye to the future, companies are pooling all the red ink they can.
JPMorgan Chase & Co. bought the assets of Washington Mutual Inc. last year. Then when it appeared the shell of the bank holding company may contain $20 billion in losses, JPMorgan Chase hustled to court to claim some Wamu losses were "tax attributes not properly allocable to the debtor's estate."
When Citigroup Inc. converts its preferred stock and trust securities to common shares this month, it also will have in place a "tax-benefits preservation plan" to ensure that the massive dilution will not result in a change of control that would put its $44 billion in deferred tax losses out of reach.
These are two of several adjustments financial institutions are making to accumulate what benefits they can from the mortgage debacle.
Losses carried forward are warehoused on the balance sheet as deferred tax assets, or DTAs for short. And because they are assets, they are a component of capital that banks need.
"JPMorgan in effect is trying to maximize the losses it receives with Wamu because they have value today," said Sang Kim, a partner at DLA Piper in Silicon Valley and a member of DLA's international tax law practice.
A change in tax law provided further incentive by waiving the limitation on the deduction of losses on loans and bad debts for banks acquired prior to January. Filings in the Washington Mutual bankruptcy indicate JPMorgan Chase is trying to capitalize on that change.
A JPMorgan Chase spokesman said the company would not comment on its filings in the Washington Mutual bankruptcy.
JPMorgan Chase isn't alone in the pursuit of tax savings. The 10 banks that repaid their federal loans under the Troubled Asset Relief Program had among them more than $33 billion in accumulated net operating losses as of the end of 2008.
That is triple the amount of the prior year.
Citigroup's $44 billion in deferred tax assets could shelter from taxes of more than $120 billion.