Banks get deductions for mortgage-security losses

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By The Associated Press

WASHINGTON — The biggest tax breaks in the financial industry rescue may be those that aren’t even in the bill.

Banks and other financial institutions can write off billions of dollars in losses after they sell bad mortgage assets to the government.

The House on Friday passed the bailout, in which as much as $700 billion of taxpayer money will be used to buy up distressed mortgage-backed securities. Those securities are now dead weight on banks’ balance sheets, smothering the credit system.

If a company ends up selling securities at a loss to the government program, the amount of the loss may be applied toward a deduction on their corporate taxes. 

For instance, if a company has what it had valued at $20 billion worth of such securities on its books, and sells them for $10 billion to the government bailout program, it can claim a tax deduction of $10 billion. At the normal corporate tax rate of 35 percent, that could add up in theory to a $3.5 billion savings for the company, and $3.5 billion less in taxes paid to the government.

All that assumes, though, that the companies are making enough money to claim the deduction against other profits.

Figuring out how many such deductions there may be is difficult because of so many variables — particularly since no one is sure what price the government will end up paying for the securities.

“The real question is how much does the Treasury pay for those assets,” said James Angel, an associate professor of finance at the McDonough School of Business at Georgetown University.

Angel said it was also possible that some banks already may have written down their assets, so that in selling to the government, they could even claim a profit and end up paying more taxes.