Fannie Mae Plus Goldman Plus Tax Credits Plus U.S. Treasury Add Up to Big Mess

In a prior job, I spent a decent amount of time on Affordable Housing tax credits. The idea was to reduce my life insurance company client’s taxable income to the point where they would be close to but not subject to the corporate alternative minimum tax. Occasionally my work would take me on trips to industry conferences on Affordable Housing. When I would go to these meetings, there would be a panoply of players there — Banks, Insurers, Utilities, perhaps a health insurer or two, and a few other odd tax-focused companies would attend. In addition to tax benefits, often banks could get some amount of Community Reinvestment Act [CRA] credits for financing affordable housing.

Oh, there were Fannie (FNM) and Freddie (FRE), also. They each represented 1/3rd of the investment base, leaving 1/3rd to everyone else. So at the conferences, there would be a lot of them around. Throw a rock, hit someone from a GSE.

The tax credits made a lot of sense for Fannie and Freddie back when they were profitable. The credits/deductions minimized their taxes. (They had numerous tax reduction schemes, but this was a big one.) But now Fannie and Freddie are unprofitable, and it is less than certain as to when they will ever be profitable again. It would make a lot of sense for Fannie and Freddie to sell their Affordable Housing deals to some profitable entity that can use the reduction in taxes.

I have gone through a deal like this for a former client back in 2000. It’s complex but not impossible to do. The problem for Fannie Mae in this case is that they are now controlled by the US Treasury, and the prospective purchaser is Goldman Sachs (GS). Very bad optics. The US Treasury does not want to look like it is favoring Goldman by approving the deal, and it is conflicted in its decision, because allowing the transaction will cause the Treasury to take in less taxes, though it might increase the value of Fannie.

This is what you get for having the Government take stakes in businesses that they regulate, rather than doing a simple liquidation of a very large failed enterprise. (Stories from NYT, WSJ) Both business and politics end up worse off when they are not kept as separate as possible, so that the ordinary conflicts between the two stay at the level of business pushing back over regulations and the government attempting to correct business abuses.

I don’t know where this one goes. Goldman buying the tax credits should have been a moderately complex deal, but the complex interests of the US Treasury make the matter much more difficult. My intuition says this won’t be the last time we see a conflicted situation like this in the near term.

Comments

[Tony Petroski:]

Mr. Merkel. You've touched a nerve here. I've spent my life in providing affordable housing. It wasn't my intention, but it got done anyway.

Mr. Merkel: "The problem for Fannie Mae in this case is that they are now controlled by the US Treasury, and the prospective purchaser is Goldman Sachs (GS). Very bad optics."

The old timers knew that Fannie and Freddie were controlled by the treasury. The idea that they were "private" was created so that we could understate the true extent of the government and its commitents.

"Both business and politics end up worse off when they are not kept as separate as possible..."

They are necessarily intertwined.

The American idea is that government establishes the rules and works as a referee, not a player. I think I hear a Supreme Court Justice say that.

Nov 02 07:12 PM

[orangest:]

November 2, 2009 New York. In a follow up to the successful multi-billion dollar purchase of tax credits from government-controlled mortgage giant Fannie Mae, Goldman Sachs Group, Inc. (NYSE: GS) announced yesterday an asset purchase agreement with the United States Treasury.

Under the agreement, Goldman Sachs will acquire majority of Treasury’s assets, consisting primarily of the building on Capital Hill and high speed printing presses. Most of the senior Treasury employees are expected to join Goldman. Liabilities of the Treasury, consisting of some accrued vacation time, a bill from Staples, as well as some $13 trillion of debt, will remain with the US taxpayers. Additionally, the taxpayers will retain all the pension liabilities and future tax liabilities arising from the transaction.

The CEO of Goldman Sachs, Ivana B. Richmore, remarked “This transaction solidifies the long standing relationship between our firm and the US Treasury, which over many years has been very beneficial to both parties, or at least to us. We think very highly of the US Treasury, especially its people – after all most of them are our former employees – and look forward to having the Treasury as a subsidiary of Goldman.” The new division will be known as FART (Former Assets of Retarded Taxpayers).

Silly Dullwit, the recently appointed Secretary of the Treasury, stated “the FART transaction is the latest step of bringing the Treasury into the 21st century world of deregulated markets. This transaction forcefully allocates resources to the core competencies of both parties – Goldman Sachs will be able to print more money than ever before, without being burdened by pesky taxes, while US taxpayers will continue to do what they do best – servicing trillions dollars of debt.

As part of the transaction, Goldman Sachs agreed to permit its new subsidiary to provide financial assistance to US Government, for a limited period of time and if convenient.

Nov 02 11:10 PM

[RK:]

I am not familiar with the complexity of the deal. Why can't AIG just auction off the tax credit? On the other hand, I am enjoying seeing how the government runs GM, Chrysler, AIG, Fannie, Freddie and Citi. While I am sure it will not be good for these companies, perhaps the rest of the country and the pols will learn a lesson and think twice about having the government be a majority shareholder.

If I were an employee (especially a valuable employee) at these companies, I would bail.

Nov 02 11:56 PM

[BRUCE E. W.:]

GS and GSEs are quite similar these days. They're both gov. backed so why the slant against an underserved market that was actually designed to help people establish themselves? There isn't really any difference between the government backed financial service sector that failed and was bailed out; in principle. What hypocracy!

Nov 04 01:01 AM

[jambo:]

On Nov 02 11:56 PM RK wrote:
While I am sure it will not be good for these companies,
> perhaps the rest of the country and the pols will learn a lesson
> and think twice about having the government be a majority shareholder.
>
>
> If I were an employee (especially a valuable employee) at these companies,
> I would bail.

OOOPPS, dont look now but this scenario is about to increase ten-fold with the scurrilous health care contrivance as presented by our Senate.
You think post Soviet Russia was a ripoff?, wait'll you see what this does to us!
We'll look back on the 'good ole days' when all we had to pay for was FNM & FRE

Nov 06 03:58 PM

[jambo:]

Hypocrisy??? Please read post by orangest.
If this is your view of 'what's good for folks' then may you become one with your god.
Clearly, what something is "designed to do" in a political sense has sod-all to do with it's outcome.
The entire housing bubble was begun on an idea "designed to help people establish themselves" (although in some measure cynicism must be set aside to swallow that) We see how that has turned out.


On Nov 04 01:01 AM BRUCE E. W. wrote:

> GS and GSEs are quite similar these days. They're both gov. backed
> so why the slant against an underserved market that was actually
> designed to help people establish themselves? There isn't really
> any difference between the government backed financial service sector
> that failed and was bailed out; in principle. What hypocracy!

Nov 06 04:10 PM

[jambo:]

Well considered article Mr Merkel. I reluctantly agree with your guess for the future.
thanks

Nov 06 04:15 PM

[talld:]

If you look at the actual inventory of Freddie and Fannie it is clear they were not holding many bad loans in the beginning of the collapse, as their max loan size was way down around 300K. and the four states which brought us the housing bubble were changing way more than that for homes.

When a lot of lenders with these larger loans (read fat cats with political connections) realized these loans were probably worthless, they lobbied successfully to get the loan limits raised, and then promptly dumped a bunch of near worthless paper on Freddie and Fannie. Paper which was previously selling for 25 cents on the dollar.

Nov 06 10:03 PM

[JeffDB:]

Good article, Mr. Merkel.
Thanks for posting it.

Nov 07 12:52 AM

[Robespierre:]

"The US Treasury does not want to look like it is favoring Goldman by approving the deal,"

LOL since when does the Treasury care about what it looks like? If this saves GS tax money it will get done. They didn't spend all that lobbying money for nothing.

Nov 07 08:17 AM

[Tesa:]

Basically these banks:

- have passed their losses to the public
- they have traded against worthless leverage assets that they have dumped on the public
- they have received a subsidy from public to prevent their collapse and in return they have rewarded their executives with bonuses

And now they want to extract more cash from public through :
- further tax subsidy and taking those collapsed assets
- To either sell them again back to the public through the back door or hold on to these assets and jack them up and profit from them.

It is obvious that privatizing Fannie and Freddy has been very costly for American public. There is no way that public ownership of mortgage business would have cost the American public this much losses over and over.

The mortgage vending that is virtually subsidized by the public should be removed from private banking because they use this business to dump their losses on public using multiple paths.

Nov 08 08:56 AM

[User 233340:]

Why do we to generate more new affordable housing? Isn't there an over supply of inventory (i.e. entire subdivisions empty, deals that were halted in the crises, apartment complexes with only 70% occupancy...).

There as to be a simpler, cheaper way to make the unused housing stock usable again without involving GS, multiple lawyers per transaction, fees...etc

Nov 08 09:23 AM

[dj10:]

No Deal. Treasury nixed it.

Nov 08 11:47 AM

[Bruce Krasting:]

To have an auction you must have a number of potential bidders. To be a candidate for this deal you must be a financial company with a big balance sheet. You must have current and predictable future earnings.

There is no one that looks like that but GS and Buffett. Sorry, no auction.


On Nov 02 11:56 PM RK wrote:

> I am not familiar with the complexity of the deal. Why can't AIG
> just auction off the tax credit? On the other hand, I am enjoying
> seeing how the government runs GM, Chrysler, AIG, Fannie, Freddie
> and Citi. While I am sure it will not be good for these companies,
> perhaps the rest of the country and the pols will learn a lesson
> and think twice about having the government be a majority shareholder.
>
>
> If I were an employee (especially a valuable employee) at these companies,
> I would bail.

Nov 09 08:25 AM

[User 57320:]

I am completely in favor of Fannie, Freddie or anyone else selling their tax credits, just like they should sell any other assets that don't make sense any longer. FN/FRE supported the tax credit business for years. OK. That's what it was created for. Now let them sell those credits. If we don't like the sale to a Goldman or Buffett is it because we think FNM is getting a bad deal? Let them sell the paper via an auction process and see who wins. But for Treasury to prevent the sale is tantamount to saying,"This is a government OWNED company and we have decided that it's best for the Government to prevent this transaction". Let's stop the guise that FN/FRE are not full faith and credit of the US. Otherwise, let them sell these assets.

Nov 09 01:22 PM

[Dan Boone:]

There a plenty of unsold affordable housing tax credits sitting with syndicators that GS can buy and reduce their tax obligation. It's going to happen and there is nothing the Treasury can do about it. The idea that not selling the GSE held credits will result in tax revenues is a pipe dream for simple monded folks.

Nov 10 11:21 PM