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Thursday, July 25, 2013

Busted firms claim billions in ‘stimulus’; speculators will get some of it



January 12, 2010 by · Leave a Comment 

By Tom Hals, Reuters

WILMINGTON, Delaware — The U.S. government has provided more than $1 trillion of support to financial companies in a bid to keep credit flowing to the U.S. economy. But a new law may give billions of dollars to bankrupt financial companies that will never make another loan. Instead of allowing lenders to keep credit flowing, these subsidies could mainly help hedge funds that buy distressed debt and equity.

This past week, for instance, Washington Mutual Inc. and subprime lender Downey Financial Corp., both bankrupt, said the new law will allow them to apply for an estimated $2.75 billion combined in tax refunds.

It is not clear if the companies will get that refund, but investors are betting there is a good chance they will.

The tax benefit was tucked into legislation late last year that broadened unemployment insurance and extended tax credits for homeowners. The provision allows companies of all sizes to apply losses in 2008 or 2009 to prior income over five years to receive tax refunds. The previous standard allowed them to apply losses back two years.

Chief executives and industry groups representing manufacturers, homebuilders, and retailers pressed for that tax benefit, although economists expect businesses from across the economy to reap some gain.

Part of the money paid out as 2010 refunds is expected to be recouped in the next few years when businesses turn a profit and begin paying taxes again.

But some of the companies that plan to seek a refund will never pay tax, because they have no future.

The professionals who are liquidating bankrupt companies including Circuit City Stores Inc and Linens ‘n’ Things are going through the corporate books in anticipation of getting cash back from Washington. The refund money will be used to pay off creditors.

“What’s a genuinely targeted stimulus to one person is a windfall to another,” said Jack Butler, a partner in the corporate restructuring practice at Skadden, Arps, Slate, Meagher & Flom. He emphasized the law will provide capital and liquidity to many companies that are struggling to avoid bankruptcy.

“Where it becomes a potential windfall is in liquidating situations,” said Butler.

Arguably, helping creditors of bankrupt retailers, such as clothing suppliers, has some social benefit.

But for bankrupt financial companies, their suppliers are mainly investors that gave capital to the company. And at this stage, most of the original investors have sold their claims to hedge funds that specialize in navigating complicated bankruptcies.

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