Back in 1988, while trying to entice healthy companies to take over failing savings and loan firms, the federal government offered investors a deal - tax-free payments to the new owners to offset losses on their newly acquired S&L assets, plus allowing some of them to deduct the losses from their taxes.
In other words, the investors are recompensed in two different ways for the same loss.The Treasury Department and some members of Congress now want to take away the tax breaks retroactively, a move that could recoup as much as $4.2 billion.
In some ways, the idea doesn't seem to be a bad one; after all, the law already is supposed to prevent double dipping, although it's unclear why the restriction was ignored in the S&L bailout. The questionable part is the attempt to undo the arrangement so long after it was put in place.
Treasury would like to take the S&L owners to court in an effort to recover the money, based on current law, but says its chances would improve if Congress were to pass a law "clarifying" the situation.
Aside from the problem of legality - passing a law to retroactively rescind benefits given earlier looks like a clear violation of basic legal principle - there are concerns about the government breaking its word. Washington already has enough credibility problems without casting further doubt on its integrity by backing out of this part of the S&L deal.
Besides, without the extra incentive, the new owners might not have acquired ailing S&Ls. So they can argue that they should not be required to pay back their reward, long after the fact, for having taken some extra risks.
That argument has merit and ought to carry the day, but it still doesn't justify double dipping. One incentive ought to be enough.
The way to fix that is to clearly end the practice now - but without trying to take back money gained in previous years as part of a good-faith understanding between private investors and federal officials.