Privatizing Gains, Socializing Losses

Will homebuilders get a mulligan? That's golf-speak for a do-over. When a golfer hits a truly horrendous shot, his buddies (once they get done laughing) might graciously ignore his shot, pretend it never happened. He gets to hit again from the same spot without a penalty--a mulligan.

The U.S. Senate wants to grant a similar reprieve to two industries that conspired to create a bubble in housing. Builders and lenders made fat profits for several years by putting up houses faster than Americans could occupy them. It got to the point where houses were bought not for mere shelter, but for the prospect of resale at a higher price. Why bother moving in when (a) you already had a decent home and (b) you were just going to flip the property anyway? Easy money created by the Federal Reserve led to an artificial demand and, eventually, an over-supply of unaffordable homes.

It was a train wreck in slow motion. We all knew the pace of building was unsustainable, but the lenders kept lending and the builders kept building. The activity served no useful social purpose, but dished up immediate profits. Company executives got mega-salaries and stock options. Investors saw rising share prices, and Uncle Sam collected rising corporate tax payments. Short term, steroids are awesome.

Now come the consequences. Homebuilders and mortgage lenders are reeling from a falloff in demand and the failure of borrowers to keep up with their payments. For these companies, the bad news that they are now losing money outweighs the good news that, hey, at least they don't have to pay income taxes anymore. But wait, Congress has a solution in the Foreclosure Prevention Act of 2008: how about if we refund to these companies the taxes that they paid when times were good!

That's right, we will expand the so-called "tax loss carryover," an accounting tool by which companies are allowed to deduct net operating losses retroactively against earlier profits. Ordinarily companies can reach back two years to erase earlier profits (hence, earlier tax liabilities), but the Senate bill hashed out on Wednesday would double that to four years. Lobbyists had failed to get the new provision included in the economic stimulus bill passed two months ago. But lobbyists are nothing if not persistent. Only once before, in the wake of 9/11, has Congress extended the carryover timeframe.

This is yet another case of taxpayers bailing out risk-takers, this time to the tune of $6 billion. In the words of Minyanville's Fil Zucchi, "if ever there was an action that should undermine investors' confidence in the U.S. market system and reinforce the view that the government exists to grease the palms of those who pay their way into influencing the government, this is it."