WASHINGTON — Members of the Financial Crisis Inquiry Commission sought Wednesday to overturn the conventional wisdom that Wells Fargo & Co.'s purchase of Wachovia Corp. was done without government assistance.
At a hearing on "too big to fail" institutions, panel members focused on a change to the tax code made by the Internal Revenue Service shortly after the Federal Deposit Insurance Corp. announced it would provide open-bank assistance to Wachovia.
Panel members said the change allowed Wells Fargo & Co. to purchase Wachovia without FDIC help, but still counted as government assistance.
"How can you say it wasn't a loss to the government?" said Bill Thomas, a former chairman of the House Ways and Means Committee, who serves as the Commission's vice chairman. "It was a significant loss of revenue to the Treasury."
Under the original deal, announced Sept. 25, 2008, the FDIC would have backstopped Wachovia's sale to Citigroup Inc. Within a few days, however, the IRS announced a change that would allow banks to carry forward losses from the acquisition of troubled financial institutions.
The tax change was a significant potential boon to Wells Fargo, which shortly thereafter launched its own successful bid to acquire Wachovia that did not involve FDIC assistance.
Robert Steel, the former chief executive of Wachovia, argued the IRS deal was not a government bailout because it potentially benefited several institutions, instead of just Wachovia and Wells.
But Thomas and other commission members disagreed, raising concerns about why the IRS made the change at the time that it did.
"It was a rifle shot," Thomas said. "They changed the law for a specific group of institutions. Did anyone think that was lawful?"
The IRS announced the change on Sept. 30 after pressure from Treasury officials. Thomas said FDIC and Federal Reserve Board officials, who denied they were involved in the change, clearly benefited from it.
"You were pleased the IRS made the change unilaterally, without consultation with the legislative branch," said Thomas. "It cost the taxpayers to utilize this. You [the FDIC] were home free. The Fed was home free."
He was seconded by Byron Georgiou, another commissioner, who said the tax change was a "different form of government assistance, perhaps a delayed form of government assistance."
"But at the end of the day, the taxpayers will have less revenue over time," Georgiou said.
Panel members offered varying estimates for how much the change helped Wells, which has said it has yet to recognize the carry forward for tax purposes. (The tax change was later reversed by Congress.)
Thomas reserved much of his anger for Steel, who was a top Treasury official shortly before taking the top job at Wachovia.
"I think a lot of us have concerns about the kinds of discussions that went on behind closed doors, including changing the law of the internal revenue code to make it expedient to take a course of action that didn't cost the FDIC anything or the Fed anything," Thomas said to Steel. "How can you say this was without taxpayer support? I know who you were looking out for."