Goldman seeks to buy Fannie Mae assets
Tuesday, November 3, 2009
Goldman Sachs is proposing to buy millions of dollars in assets from struggling mortgage finance giant Fannie Mae, an offer a recent Treasury Department analysis found would not be advantageous for taxpayers, people familiar with the matter said.
Treasury's finding raises the odds that the Obama administration will seek to substantially alter or even block the deal, the latest example of the government's growing role in overseeing negotiations between financial companies.
Goldman is looking to buy millions of dollars in Fannie Mae assets in part because it would provide a tax benefit to the Wall Street bank, reducing its tax payments. But the deal comes at a sensitive time, when resentment remains over the ability of Wall Street firms like Goldman to rebound so quickly, racking up healthy profits after taking government bailouts at the height of the financial crisis.
Treasury has a say in the matter because the federal government seized Fannie Mae in September 2008 and has since pumped more than $45 billion into the company to keep it afloat. While technically a public company listed on the New York Stock Exchange, all of Fannie Mae's major business decisions are reviewed by federal officials.
Fannie Mae and its sister company, Freddie Mac, which was also seized last year, face several conflicting demands under government stewardship. They still must try to maximize profits to pay back taxpayers. But they also play key roles in carrying out the Obama administration's housing policy, which involves fighting foreclosures and reducing the costs of obtaining a home loan. These measures may benefit the nation's housing market, but aren't necessarily helpful for the companies' profitability.
The Wall Street Journal on Monday reported some details about the Goldman Sachs offer. The discussions focus on low-income housing tax credits owned by Fannie Mae.
These credits are accumulated by companies, such as Fannie Mae, that invest in low-income rental properties. Companies can deduct the value of the credits from their income tax bill or sell them to other firms.
But these credits have lost much of their value over the past 18 months as the economic crisis has worsened and financial markets have plummeted. Firms didn't plan on making much profit, so they didn't need tax credits.
The declining value of these credits has forced Fannie Mae to record even greater losses, requiring more government capital to stay solvent.
Goldman Sachs, which is booking big profits, is interested in buying credits from Fannie Mae at a discount. Fannie Mae could use some of the cash raised to burnish its balance sheet with the hopes of one day paying back taxpayers.
But Treasury has concluded that the deal would likely be a wash -- with Goldman Sachs saving on taxes whatever it pays Fannie Mae.
In a way, the numbers involved are quite small. Goldman Sachs is reportedly looking to buy up to $1 billion in tax credits. That would hardly make a dent in Fannie Mae's liabilities, about 2 percent of what the firm owes taxpayers.
Treasury officials have said they wouldn't let a deal move forward unless taxpayers were advantaged. Goldman has said it wouldn't pursue a deal if it weren't in taxpayers' best interest. Fannie Mae declined to comment.
It's not clear if Treasury is being tough with Goldman simply to force it to pay top dollar for the credits.
But the debate over whether to allow the deal also highlights challenges at Fannie Mae and Freddie Mac.
Treasury and the White House are in the midst of discussions on how to reform Fannie Mae and Freddie Mac, with the goal of setting a plan for the future of the nation's housing finance system by early next year.
Executives at the firms, while continuing along fulfill U.S. housing policy, are left in limbo, unclear if their firms ever will be normal companies again.
There have been massive financial liabilities imposed on both firms as a result of the government bailout, and there is no mechanism right now for the companies to pay back taxpayers, even if the economy recovers and they start to make profits.