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Fannie's Tax Sale to Goldman - No Deal! Bad 'Optics' the Cause?
This is an odd ending to this
saga. Some very big names were involved. Fannie Mae clearly wanted to
do a deal; the regulator for Fannie (FHFA) was strongly supporting it.
Goldman Sachs was looking to make a buck putting the transaction
together and selling it to Warren Buffett. 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. Today 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’
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:
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.”
»
Ritholtz weighs in with a stinging rebuke of all things Buffet
http://www.ritholtz.com/blog/2009/11/treasury-dks-goldmanfanniebrk-tax-c...
Bruce - your dead wrong.
Goldman was offering .50 on the $1 for these credits. Taxpayers were about to get bent over yet again.
Sorry, but you are wrong. Yes, this transaction would have specifically helped Fannie Mae. But yes also the Treasury would receive less in the payment of taxes from the likes of Goldman Sachs and Warren Buffett. Fannie Mae is the government. The government's net tax receipts would fall. The Treasury made the right call.
Hey Bruce, I got news for you pal. Fannie is owned by the government. And when the government wants to sell assets, they put it up for bids. The highest bid wins.
That's how the BLM sells land. That's how government surplus auctions work.
Since when is it legal for Fannie to decide to sell a government asset in a private deal with Goldman without going through a public auction process. In fact, I don't see anything on Fannie's web site specifying selling of assets.
FDIC sells loans and and homes. Everything for sell is publically listed on fdic.gov.
Get it? If this deal is legit, then PUT THE DAMN THING UP for auction.
Or maybe you're FOR no-bid oil contracts in Iraq that go directly to Halliburton also?
George Orwell
I don't think this is an auction situation. You need a large financial with a strong balance sheet and and a predictable stream of future earnings. There is no no bank in the US that meets that profile. So no auction.
Haliburton? Did I say that?
Too big for free market? Sounds like a recurring theme here.
Acid test.. "Small" scale model of "Marked Assets" but remember Warren warned that we are selling the farm for a long time already. Damn straight he was telling us straight then but who has a memory anymore to ethics on the Hill. Maybe they blew smoke at him and he pulled the cord not them. No matter what the taxpaper thinks they allowed this to happen and given the acrimony at all levels now it is close enough to the cycle why would they care anyway? Feeding time for the sheep comes soon anyway since really the majority are to selfish to cope with anyway since moral hazzard is really bottom to top also. Either way given the levels of incarcerated or lack of tells me what we already see. Incompetence....
Treasury cold shouldering GS? WOW!
Writing is on the Wall and they know it!
Ron Paul for Prez
This was just too blatent. Besides Treasury will now use this to say they are not in Goldman's pocket.
Why would the government be bailing out the shareholders of FNM to the cost of the taxpayer. I am already amazed they are keeping something of AIG's shareholders intact with the spinoffs I read about yesterday. Both of these outfits need to be put in bankruptcy and the shareholders wiped out entirely. Bonuses paid to FNM and FRE's officers need to be clawed back with all the fraud they carried on with the implied guarantee of the government. We hear so much about Mazillo who ran Countrywide, but nothing about Raines, Obama's buddy that ran FNM. FNM and FRE will be $1 trillion each before the meter quits running and the shift in losses is meaningless unless they are going to find a way to stuff the company back to the shareholders. I am not opposed to bailouts so much as I am opposed to shareholder bailouts. IF shareholders are so stupid they let moral hazards run their companies, then they made bad business decisions and should lose, just like a guy that puts his life savings into business that fails.
Isn't this straightforward; and not in the taxpayers interest? Since we own Fannie, if we do nothing, we get nothing for the tax credits and Goldman pays their taxes (let's say $5.2 billion).
If we "sell" the tax credits to Goldman, we get the sales price, which presumably will be less than $5.2 billion -- probably considerably less, and Goldman does not pay $5.2 billion in taxes.
So, if the deal goes through, aren't we the taxpayers out by the amount of the discount?
+1
GS is full of S#**. I would like to know what the discount was?????
I think you're correct, that this is more about optics than economics. But, the link posted by #123746 to "The Atlantic" makes a very good point also...
All the best
" Clearly Fannie’s management and regulator were happy with the numbers. They must have considered the taxpayer side of this before signing the deal."
You really think so? I have to deal with a lot of people at Fannie in my job. I sincerely doubt they were worried about the taxpayer.
Plus, Bruce, when it comes to taxes, it truly is a zero sum game. You should know that. There was no economic benefit here, there was nothing going to be produced. Goldman and/or Buffet would not have done this if there was not benefit for them. Thus, it had to have cost the taxpayer.
I think you are way off base in your criticism of Treasury.
In these things I have seen that it is the time value of money that makes for a different assessment. I am not sure it is a zero sum game.
Like I said, I would like to check the math. I think Treasury left real money on the table in order to avoid an unpopular deal.
Maybe I am off base with this, The choice was to blame GS or Treasury. Treasury did not invite me to their blog confab so I lean on them...
Just kidding.
When these guys are paying close to zero for their money, time value has little impact. This was just an opportunity to fleece the tax payer and should not have occurred.
if there were economics that justified the sale - I think the treasury would have been quick to offer them up. I thought this article summed it up quite nicely
http://business.theatlantic.com/2009/11/goldmans_attempt_to_buy_fannies_...
My guess is that the government employees didn't even understand this thing, but just figured (probably correctly) that if Goldman wanted to do it, it wasn't a good deal for the government.