In December, a lot of articles will be printed up telling people to sell some of their loser stocks for tax purposes. This is actually pretty good advice, subject to some caveats that I don’t particularly want to discuss right now. The point is, the US government assesses taxes based on realized gains. Let’s say you bought Citigroup at $1.86 a share and decide to sell now at $5.23 a share. You’ll have made a profit, and that will be subject to a capital gains tax. However, suppose you also bought AIG at a split-adjusted basis of $1000 a share. That $50 per share price is effectively worthless. You might just decide to hold on to it for all eternity, hoping it recovers. After all, you’ve already had most of the losses. But you won’t hold on to it, because there’s a tax advantage to dumping it and taking the loss (also, it’s a sunk cost, dump her and move on). The point is that the government only considers gains and losses when the actual money comes in.

This strikes me as remarkably consistent of them. And this is why, even if the banks that were too big to fail became bigger, and leverage has returned to pre-crisis levels, and packaging crap and calling it AAA is happening again, and this whole crisis might simply have had the stakes raised by pouring more money into the cause, instead of the solution to the problem, the government continues to make claims that they have made profits off of the bailouts. Some banks were guaranteed to pay the money back. Heck, the government put exactly enough into AIG to make sure all of the big investment banks (save Citigroup) could pay the money back. Those that can’t pay the money back won’t be counted unless they go bankrupt (I’ve recently discovered that a Santa Barbara bank is one of the banks that has halted all TARP payments … they are not counted as a loss). If the Fed gets its way, inflation will slowly reduce the real value of the debt to the point that even the weaker banks will be able to pay the money back. Fortunately, capital gains are not adjusted for inflation.

You must admire the consistency.