Is Henry Paulson Channelling Chairman Mao?

One of Chairman Mao Tse Tung’s “sayings” immortalized in his Little Red Book deals with stealth in politics and war. “Make a noise in the east,” the Great Helmsman wrote, “and strike in the west.”

On Monday afternoon, I realised that Treasury Secretary Henry Paulson is channelling Chairman Mao. While everyone on the Hill and around America was focusing attention on the election and bank rescue plan – a noise in the east – on Sept. 30, Paulson struck in the west by quietly giving banks a $140-billion windfall by issuing new regulations under an arcane provision of a seldom used 1980’s-era tax law involving corporate mergers.

According to The Washington Post, the change to Section 382 – a provision that limits a kind of tax shelter arising in corporate mergers – came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, bank lobbyists told the Post, its opponents thought it would be nearly impossible to revamp the section because it would look like a corporate giveaway.

It would look like a giveaway because that’s exactly what Paulson intends it to be, and Goldman Sachs best friend in Washington pulled a fast one on Congress and the American people while everybody was looking the other way.

If people called Bill Clinton “Slick Willy,” this must make Henry Paulson a 21st century Wily Coyote. He’s like Willy Sutton, the once-famous bank robber: Sutton said he robbed banks because “that’s where the money is” and Paulson robs taxpayers for the same reason.

Muck And Mire

Listen to Treasury’s rationale: Spokesman Andrew DeSouza says Paulson has the legal authority as part of his power to interpret the tax code and provide legal guidance to companies. He described the Sept. 30 notice, which allows some banks to keep more money by lowering their taxes, as a way to help financial institutions during a time of economic crisis.

Apparently, Paulson doesn’t think that Seven Hundred Billion Dollars is enough of a helping hand to get clever, greedy bankers with their voracious appetite for grabbing someone else’s cash out of their own muck and mire.

Even more egregious, noted tax lawyers and other experts around the country say Paulson’s gimmick isn’t even legal.

"Did the Treasury Dept. have the authority to do this? I think almost every tax expert would agree that the answer is no," George K. Yin, the former chief of staff of the Joint Committee on Taxation, told the Post’s Amit Paley. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."

Adds Candace A. Ridgway, a tax partner at the law firm Jones Day, "It was a shock to the tax law community. It was one of those things where it pops up on your screen and your jaw drops.

"I've been in tax law for 20 years and I've never seen anything like this," Ridgway asserts in an interview with Paley.

Today, I spoke briefly with 10 US tax lawyers I know well in New York, Washington, Chicago and Minneapolis. All said Treasury has no legal authority to unilaterally change the meaning of Sect. 382; at least two of the 10 were aghast Paulson would try pulling such a stunt in the waning days of an administration already blamed for being too cozy with Wall St. and causing the financial crisis.

Now What?

Here’s the rub.

If either Treasury repeals its own regulation or Congress does it for Paulson, there’s a serious risk that more than a few of the recent bank mergers – many engineered by Treasury, the Fed or the Federal Deposit Insurance Corp. to prevent weak banks from collapsing – will unravel. The tax benefit Paulson created is likely to be one of the driving forces behind a healthy bank’s willingness to take over a sick sister; in some cases, the acquiring bank might well have its entire, potential exposure covered by tax breaks generated by the deal.

About the best thing would be for Congress – preferably the lame duck session that convenes shortly or at least the new one in January – to turn back Paulson’s slight-of-hand trick without toppling existing merger deals. No one would gain by a sudden rash of unexpected bank failures, and the ensuing losses would put the FDIC at risk.

Still, if anyone needs proof at this late date of the deceitful behavior of Henry Paulson and the rest of the Bush gang, they need look no further than the Sept. 30 regulations for Sect. 382. Someone better lock the cash register now, before the door slams into their backside as they leave office Jan. 20, 2009.