U.S. Rep. Steven C. LaTourette (R-OH) says the Pittsburgh-based bank that bought National City Bank could get a $5.5 billion tax break that is almost equal to National City’s purchase price, and will also get National City’s share of $7.7 billion in bailout money.

 LaTourette said the tax break is due to a little noticed Treasury-IRS decision issued on September 30 while Congress was debating the bailout package.  Three days later, on October 3, Congress approved the $700 billion rescue package.  The bailout measure signed into law does not include the tax change.  LaTourette, who opposed the bailout bill, said the tax change will allow PNC to write down about $20 billion in National City loan losses.

 LaTourette said the action could open the flood gates for more bank mergers and acquisitions because the new treatment hugely favors banks that acquire other banks.  The New York Times described the tax break as “worth billions to the banking industry” and said it “has only one purpose: to encourage bank mergers.”

 “Congress was told the bailout was to purchase toxic mortgage assets, and then Paulson switched gears and said Treasury had to take an equity stake in banks to ease the credit crisis and free up loans.  It turns out that banks that take money from the Feds don’t have to issue more loans, and instead can use that money for bank acquisitions,” LaTourette said.  “The decision to relax this tax rule is just icing on the cake for banks.”

 LaTourette said he’s also very troubled that PNC will get $7.7 billion in bailout money, far more than the 3 percent it is entitled to under the Troubled Assets Relief Program (TARP) rules.  Published reports indicate that PNC was able to get so much extra funding from the government because regulators encouraged it to apply for National City’s share.

 “When you couple billions of dollars in government assistance and tax breaks for banks with a regulator who can pick winners and losers, bad things are going to happen, and National City was on the losing end,” LaTourette said.  “I fear banks will seek bailout money not to issue more loans but to gobble up other banks and get a tax break for doing so.   Let’s stop the pretense of calling this a rescue package.”

 LaTourette said House Minority Leader John Boehner is expected to send a letter to Treasury Secretary Henry Paulson today saying troubled-asset funding should not be used for bank acquisitions.  LaTourette said he outlined what has happened to National City Bank yesterday in a conference call with Republican Leaders, and Boehner said he would demand answers from Paulson.

   LaTourette said he also contacted tax and accounting expert Robert Willens of Robert Willens LLC in New York yesterday to see if the new tax treatment will be favorable to PNC, which bought National City at a fire sale price. Willens had already estimated that Wells Fargo, which is buying Wachovia, could see an extra $19.4 billion in tax savings, about $5 billion more than the purchase price of Wachovia’s stock.

 Under the new relaxed rules, Willens told the congressman that PNC should see $7 billion in tax savings or “a benefit of roughly $5.5 billion, an amount virtually identical to the cost of the deal.” Without the new tax change, Willens said PNC would have enjoyed about a $1.5 billion tax break.  LaTourette said the $5.5 billion figure is reached by subtracting $1.5 billion from $7 billion.

 Willens told the congressman that the tax break is obviously intended spur bank mergers. As Willens told the New York Times, “it couldn’t be clearer if they had taken out an ad.”

  LaTourette said he’s also deeply concerned that PNC was allowed to secure not only its slice of the bailout pie, but National City’s slice.  LaTourette said troubled-asset program rules state that the “minimum subscription amount available to a participating institution is 1 percent of risk-weighted assets. The maximum subscription amount is the lesser of $25 billion or 3 percent of risk-weighted assets.”

 
 LaTourette said PNC applied for $3.5 billion in funding from the $250 billion bailout pot set aside for banks, and was told by federal regulators to also apply for National City’s $3.5 billion share.  National City had already been told by federal regulators that it wouldn’t get any bailout money, LaTourette said.  The Feds ended up awarding PNC $7.7 billion.

 “National City has said it was interested in bailout money and was told it wasn’t getting any. I don’t know how you can massage this to suggest that National City was a ‘participating institution’ in all this. That’s like being shot and saying you were a participant in your own murder,” LaTourette said. “Federal regulators forced this deal on National City, and left the bank with no good options.  It’s a raw deal for shareholders and the thousands of National City employees.”

 LaTourette said John Dugan, Comptroller of the Currency, responded to his letter yesterday and indicated all rules were followed in awarding $7.7 billion in TARP money to PNC, and added that everything is confidential.  LaTourette said he intends to ask for all records and communications between Treasury, PNC and National City related to the National City.

 “I’m sorry if I touched a nerve, but my concern is not for Mr. Dugan’s feelings but instead for the thousands of people in NE Ohio whose jobs are at risk and the many shareholders of National City Bank who wonder how their government could do something so harmful as part of a so-called rescue package,” LaTourette said.  “This taxpayer-financed deal was done in secret, and when billions of taxpayer dollars are used to force a Fortune 500 company to sell itself in a fire sale, it demands transparency. I will be requesting all records and communications from Treasury, PNC and National City related to this matter.”