by Daniel Costello

A little-noticed provision tucked into recent unemployment legislation could bring a windfall for bankrupt banks and, more specifically, their creditors.

What do you all think?

According to Reuters:

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.

 

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.

"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.