On October 24, a group of federal banking agencies issued a statement allowing banks to recognize the effect of tax changes enacted in Section 301 of the Emergency Economic Stabilization Act of 2008 (EESA) in their third quarter 2008 regulatory capital calculations.
Banks and thrifts holding Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) perpetual preferred stock for purposes other than trading are presumed to have incurred other-than-temporary impairment losses if the cost basis of these investments is well in excess of the current market price of the stock. These losses must be recognized in earnings in the Call Reports for banks and Thrift Financial Reports for savings institutions for September 30. Prior to the enactment of EESA on October 3, losses on sales of Fannie Mae and FreddieMac preferred stock by banks generally were considered capital gains and losses for federal income tax purposes.
Section 301 of EESA allows banks and thrifts to treat losses on certain sales of this preferred stock as ordinary rather than capital losses, but under generally accepted accounting principles banks may not record the effect of this tax change in their balance sheets and income statements for financial and regulatory reporting purposes until the period in which the law is enacted, i.e., the fourth quarter of 2008. The interagency statement, issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, provides that, for purposes of the regulatory capital calculations, but not for balance sheet and income statement purposes, banks may elect to adjust the tax effect of losses on Fannie Mae and Freddie Mac perpetual preferred stock as if Section 301 of EESA had been enacted in the third quarter of 2008.