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This is an odd ending to this saga. Some very big names were involved. Fannie Mae (FNM) clearly wanted to do a deal; the regulator for Fannie (FHFA) was strongly supporting it. Goldman Sachs (NYSE:GS) was looking to make a buck putting the transaction together and selling it to Warren Buffett (NYSE:BRK.A). So why didn’t it happen?

Based on the information provided in Fannie's 10-Q the terms and conditions for the transaction were agreed to and a nonbinding contract was entered into prior to September 30th. The condition for a go ahead was subject to Treasury’s approval. Saturday we learned that Treasury has said no.

Treasury’s basis for nixing the transaction was pretty clear. In their view it would have resulted in a net loss to the taxpayer, . From the WSJ:

Treasury Department officials blocked the deal after concluding that it would have resulted in a loss of tax revenues greater than the savings to the federal government had it allowed the sale. "In short, withholding approval of the proposed sale affords more protection of the taxpayers than does providing approval".

That conclusion is at odds with Goldman Sachs. Mr. Michael DuVally a GS spokesman said of the deal:

The only basis on which approval for any transaction would be given would be if it was clearly in the taxpayers' best interest.

So who is right, GS or Treasury? Just this one time I am going with Goldman. They would not have made the statement to Bloomberg unless they had the numbers to back it up.

This was not a simple matter of Buffett writing a check and getting a specified tax benefit. It involved an asset transfer, presumably funding would have been required. The tax benefits would have been realized over a period of time. At some point in the future the assets would have reverted back to Fannie. This was a rental of tax benefits.

Given the complexity, it is possible that the parties had different measuring matrix's when assessing the merits of the deal. But I doubt that. Clearly Fannie’s management and regulator were happy with the numbers. They must have considered the taxpayer side of this before signing the deal. Same for Goldman and Buffett. They understand the necessity of passing the “Smell Test” these days.

My guess is that this deal did not crater because of bad economics. It bombed because of bad optics. The Administration did not want to be seen as facilitating a transaction that would have been perceived as benefiting the ‘Fat Cats’.

This is a sign that D.C. is well aware of the fact that a significant percentage of the populations hates our public and private financial institutions. They understand that this issue is the “Mother of all Systemic Risks”. In that light, the Administration’s decision to nix the deal makes a great deal of sense.

I fear that net net; the taxpayer will pay a price for this choice. I, for one, would like to see the actual economics of the transaction. Possibly Treasury could provide the details. My guess is that over the next five years this will cost us a few billion. That would be a cheap price if it placated an angry population. I doubt it will.

NOTE:
There is nothing new in the proposed transaction. Fannie did this in 1999 with Citicorp (NYSE:C):

WASHINGTON, March 16 /PRNewswire-FirstCall/ -- Citibank, N.A. and Fannie Mae today announced that Citibank purchased from Fannie Mae a portfolio of investments representing approximately $676 million in federal Low Income Housing Tax Credits (LIHTC) for cash plus the assumption of Fannie Mae's capital obligations relating to the investments.

In it’s November 5, 2009 10-Q Fannie Mae discusses the proposal. The cost to them of not disposing of the tax assets? $5.2 billion.

As of September 30, 2009, the carrying value of our LIHTC investments was $5.2 billion.

Source: Fannie's Tax Credit Sale to Goldman: No Deal