Banking & Capital Markets

Taxpayers Foot Bill for Wall Street Risk-taking

Investment banks will carry forward their subprime losses, which will be offset against future earnings.
Stephen TaubAugust 15, 2008

Now, this is what you call a tax shelter.

Many of the world’s largest financial companies that have taken huge write-offs after speculating on very risky securities will, as a result, wind up not paying taxes in places ranging from New York City to the United Kingdom. That’s because for the next few years, they will be able to carry forward these losses and offset them against earnings.

Case in point: Merrill Lynch.

In late July, the investment bank agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, according to a Merrill regulatory filing. The company said it will record a pretax write-down of $4.4 billion in the third quarter of 2008.

Altogether, its London-based subsidiary has recorded $29 billion in losses, according to The Financial Times. As a result, Merrill does not figure to pay taxes in the United Kingdom for several decades, the paper noted.

Virtually all of Merrill’s global activity in the CDO market has been channeled through Merrill Lynch International, its U.K.-based subsidiary, according to the report. So, at the 28 percent corporate tax rate, Merrill will be able to lower its U.K. tax bill by as much as $8 billion by offsetting losses against future profits, according to the FT.

Many other banks have recorded similarly distressing losses in the United States. The paper pointed out that UBS said most of the $42 billion it lost in the subprime crisis was booked in this country. Most of Citigroup’s write-downs were here as well.

Bloomberg News noted that New York City Mayor Michael Bloomberg recently conceded that some Wall Street firms may pay little or no New York City or state taxes for years.

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