US banks have, appropriately, taken the brunt of the sub-prime crisis. They did, after all, pretty much create it. To survive they've been issuing massive chucks of new equity to sovereign funds, in the main.
Except, this isn't equity when it comes to tax. As Jesse Drucker, a journalists on the Wall Street Journal reports:
Both Citigroup Inc. and Morgan Stanley used a financing structure that satisfies bank regulators concerned about their capital while also convincing federal-tax authorities that the interest payments they make to investors are actually tax-deductible interest on debt.
Citigroup, which used this method to raise $7.5 billion from the Abu Dhabi Investment Authority in November, likely will save about $500 million on its U.S. taxes over nearly three years. Morgan Stanley could save roughly $300 million in taxes over 2¬? years, thanks to the way it structured its mid-December deal to raise $5.5 billion from China Investment Corp.
The banks aren't doing anything improper, but merely taking advantage of a controversial 2003 Internal Revenue Service ruling that blessed the tax benefits of such deals. In recent years, numerous companies have raised money using these so-called hybrid structures, with nicknames like "Feline Prides," "Peps," and "Upper DECS." Generally, interest payments on debt are tax-deductible for companies, but dividends on common and preferred stock are not.
As ever, these bastions of 'free enterprise' are actually shown to be little more than 'free-riders'.