On Friday, October 17, 2008, the federal banking and thrift regulatory agencies issued a press release announcing that they will permit banks and thrifts to recognize the regulatory capital effect of the tax law change affected by Section 301 of the Emergency Economic Stabilization Act of 2008 ("EESA") in the third quarter 2008. The EESA was enacted October 3, 2008 (i.e., in the fourth quarter).
Section 301 of EESA provides tax relief to financial institutions that have suffered losses on their investments in Fannie Mae and Freddie Mac preferred stock. Section 301 changes the character of losses on Fannie and Freddie preferred stock from capital to ordinary for federal income tax purposes. Without the regulatory agencies recent announcement, the beneficial regulatory capital effect of the tax law change would not have been recognized until the fourth quarter, 2008.
The press release indicates that the regulatory agencies plan to provide reporting instructions to banks and thrifts describing how the tax law changes from Section 301 of EESA should be taken into account for the September 30, 2008 reports. Given that Call and Thrift Reports are to be filed by October 30, we anticipate the instructions will be provided in the very near future.
We encourage financial institutions who have suffered losses on Fannie Mae and Freddie Mac preferred stock to work closely with their tax advisors and primary regulators in preparing their September 30, 2008 Call and Thrift Reports so that they are able to take full advantage of this recent regulatory change.