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.
November 2nd, 20092:09 pm at
I don’t see the conflict for the US taxpayer in this… the conflict is for the ethically challenged people at Goldman and their puppets in the Treasury.
If the Trsy gains on FNMA and looses an equal amount in taxes — then there is no benefit and no point in hiring hundreds of lawyers to do the deal. So skip it.
If the Goldman pays more for the tax credits than they will save in taxes (stop laughing! this is hypothetical what-if), then the Trsy should print the trade all day. It seems highly unlikely Goldman will pay more for the tax credits than they save
The third scenario: The Trsy loses more in Goldman tax revenue than it gains via FNMA. This is obviously the scenario Goldman would prefer, and arguably THEIR Treasury secretary wants it as well. This is morally wrong and economically wrong, and we all know it.
Obama needs to act like he is the President and TELL (not ask) Geithner to make sure the taxpayers get scenario #2, or else no deal. Probably that means no deal — so be it.
There is no conflict here for someone who is the US Treasury Secretary representing US taxpayers. The dilemma is Geithner’s because he officially works for the taxpayer, but really works for Goldman
And he cannot serve two masters…
November 2nd, 20093:26 pm at
Isn’t this what Hayek was talking about in the Road to Serfdom–that even if there were competent and honest bureaucrats making economic decisions they wouldn’t be able to figure the correct one out?
I’m not saying the people involved here are either competent or honest, mind you, but there are way too many moving parts here.
If you work for Fannie/Freddie what is your professional motivation? To make money for the firm–or the taxpayers–or just avoid screwing up enough to keep getting paid? My guess is the latter.
November 2nd, 20094:12 pm at
Boy you are right about that.
November 3rd, 20091:05 am at
This is a real mess. Related to this, I’ve wondered why neither the independent candidate nor the GOP candidate in the NJ governor’s race haven’t hammered the incumbent for being a former chairman of Goldman Sachs, given that firm’s tarnished reputation.
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