Sandy capital update (with chart)

December 16, 2009

A ruling by the IRS will allow Citi to dodge a direct hit to tangible common equity while saving money on taxes.

A WaPo story today notes that the government’s promise to sell its stake in Citigroup’s common shares would have qualified as an “ownership change,” forcing the bank to reduce the value of its deferred tax assets.* But the IRS said not to worry about it…

I wrote about the issue last month, mentioning the potential problem of an “ownership change.”

This news is a good opportunity to update deferred tax asset figures, which Reuters’ Stephen Culp has arranged into the following nifty chart:

sandy capital

The chart is updated to include all the common equity that banks have estimated will be raised to repay TARP. It does NOT include ADDITIONAL DTAs that will be created as part of that TARP repayment.**

The problem with including deferred tax assets in capital is that DTAs are only useful when you make money, but the point of capital is to be there when you don’t.

Imagine declaring bankruptcy and asking the judge to let you pay off your credit card bills with tax loss carryforwards.

Luckily, bank regulators take account of this, sort of. The measures of capital that they look at (anything with “tier 1″ in the name) exclude most DTAs. So that’s good news.

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*For the really adventurous, here’s a slideshow explaining section 382 limitations for deferred tax assets that result from ownership changes.

**My understanding is that some banks are buying back TARP preferred at a premium to book value. This creates a loss for tax purposes, boosting DTAs. Citi also generates a DTA, I believe, by ending its loss-sharing agreement with the government.

3 comments

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Very Informative

Posted by David Cenedella | Report as abusive

Can you add some detail to the ** comment?

Posted by Kyle | Report as abusive

While we’re searching around adding up the cost of the hidden bailouts, don’t forget that this same thing happened when PNC acquired Nat City.

Much less money involved, but a billion here and a billion there and pretty soon you’re talking real money.

Posted by Andrew | Report as abusive

[…] Rolfe Winkler has a nice update on Citi’s $32 billion in deferred tax assets which the IRS just ruled the bank could keep. […]

Posted by Here’s Why Citi Is So Happy About Its $38 Billion Bailout | Report as abusive

[…] Rolfe Winkler has a nice update on Citi’s $32 billion in deferred tax assets which the IRS just ruled the bank could keep. […]

Posted by Here’s Why Citi Is So Happy About Its $38 Billion Bailout | Report as abusive

[…] A deferred tax asset […]

Posted by FT Alphaville » Further reading | Report as abusive

[…] Rolfe Winkler, who’s been following the Citi capital debate for some time now, posted a good illustration of the […]

Posted by FT Alphaville » How the IRS sort-of-saved Citi | Report as abusive