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Given the choice, Wall Street would not have chosen to blow away billions of dollars on collateralized debt obligations and leveraged loans. But, since we are where we are, is there any comfort to be had in the tax implications of such losses? Losses can create deferred tax assets, which can be usefully put to work, minimizing the tax hit in either previous or future years.

But, this being tax, it is never going to be that straightforward. First, to get the most out of a future tax deduction, a company has to report a net operating loss on a consolidated basis, for the full year. That would require heroic value destruction, which might not be the case even for the 2007 crop of appalling results. This overstates things: a company could still get a helpful tax outcome, if it can show losses incurred in a particular US state, where maybe the results are not consolidated. But the general point remains that for the tax advantage to be significant, it helps if the losses are big and are booked in an expensive tax jurisdiction. Big CDO losses in London, for instance, may be less helpful than ones booked in the US.

Another issue for Wall Street’s beancounters to worry about is whether tax authorities will agree with the markdowns that generated the big losses in the first place. Most losses have to be actually realised before they crystallise a tax benefit. But there can be exceptions: banks can elect to have their CDO trading business, for instance, assessed on a mark-to-market method.

Given the lively debate around marking-to-market, it is not unreasonable to envisage disagreements. We can look forward to a row that combines the finer points of corporate tax and the valuation of structured credit. Should be a page-turner.

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