Tax rule might have helped WaMu

Washington Mutual might have been acquired rather than seized by regulators if a recent tax-rule change had come a few days earlier, financial-industry experts say.

The change, announced Sept. 30, made bank acquisitions more attractive.

"Absolutely, there's no question in my mind" that under the new rule the Seattle thrift would have been bought before it failed, said Robert Willens, a corporate tax expert and author in New York.

The rule would have allowed an acquirer to shelter from taxes about $30 billion in future earnings, making a play for WaMu more attractive.

WaMu failed Sept. 25 when the Federal Deposit Insurance Corp. (FDIC) took it over and sold most of its banking operations to JPMorgan Chase of New York for $1.9 billion. WaMu's shares became essentially worthless.

The tax benefit was attractive enough to save Charlotte, N.C.-based Wachovia from a government-assisted acquisition by Citigroup of New York for only $1 per share.

One day after the Citigroup deal was announced, the tax rule changed, and Wells Fargo of San Francisco promptly agreed to buy Wachovia for about $7 a share.

Treasury Department spokesman Andrew DeSouza said the change "was not meant for Wells Fargo or anyone."

"We'd been working on it for many weeks, and that was the first day we could get it out."

The same tax change "would have appealed to a buyer of Washington Mutual," Willens said.

Howard Shapiro, a bank analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York, agreed: "It would have made them more attractive."

WaMu tried unsuccessfully to find a buyer in early September, though a half dozen major banks took a look.

No one made a formal offer for all of WaMu, and JPMorgan was willing to take on WaMu's troubled mortgage portfolio but not its obligations to bondholders and shareholders.

"There was no price at which a deal for the whole company would have made sense to us," Charles Scharf, JPMorgan's head of retail banking, said after it bought WaMu from regulators.

The debt and shareholder liabilities JPMorgan avoided by buying only WaMu's banking operations from the FDIC are about $34 billion, said Shapiro.

The tax benefit varies depending on loan losses at an acquired bank and the profits of the bank that acquires it. In WaMu's case, Willens estimated, it would have saved a buyer from paying taxes on about $30 billion in future income.

Tax rules aside, Shapiro does not think regulators should have taken over the bank when they did.

"We think they could have made it," Shapiro said. "It fell victim to the panic in the marketplace. I think the regulators were a little panicked themselves and I think the news media certainly fomented an enormous amount of panic."

Shapiro thinks ultimately WaMu would have been sold, but "the difference between being bought and being taken over is equity and debt investors who lost everything."

Melissa Allison: 206-464-3312 or mallison@seattletimes.com