Fannie + Goldman + US Treasury + Tax Credits = Complex 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 and Freddie, 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.  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.