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Goldman/Buffett/Fannie Tax Deal Inked a Month Ago
If you were curious about the recent news regarding Goldman Sachs and
Warren Buffett’s interest in acquiring the tax losses of Fannie Mae
here is the scoop.
This deal was agreed to and inked a month
ago. It is still pending approval. So the information that was first
reported by Bloomberg was a deliberate leak. Note that the 10-Q
provides an update of the deal’s status as of today. My read is that
the leakers were trying to get the deal approved before this 10-Q went
public. We are being kept in the dark.
From the Fannie Mae 10-Q , November 2009
http:
Prior
to September 30, 2009, we entered into a nonbinding letter of intent to
transfer equity interests in our LIHTC investments. Under the terms of
the transaction as currently contemplated, we would transfer to
unrelated third-party investors approximately one-half of our LIHTC
investments for a price that exceeds their current carrying value. Upon
completion of the contemplated transfer, the unrelated third-party
investors would be entitled to receive substantially all of the tax
benefits from our LIHTC investments for a specified period of time. At
a specified future date, the percentage of tax benefits the investors
would receive would automatically be reduced and the percentage of tax
benefits we would receive would be increased by the same amount. In
addition, we could have the obligation to reacquire all or a portion of
the transferred interests.
We
have requested the approval of FHFA, as our conservator, to complete
this transaction. FHFA has advised us that it has no objection to this
transaction as it is consistent with the conservation of the assets of
the corporation and that FHFA has requested Treasury’s approval under
the senior preferred stock purchase agreement. As of November 5, 2009,
FHFA has not yet received this approval. If in the future we determine
we no longer have the intent and ability to sell or otherwise transfer
our LIHTC investments for value, we would record additional
other-than-temporary impairment to reduce the carrying value of our
LIHTC investments to zero. As of September 30, 2009, the carrying value
of our LIHTC investments was $5.2 billion.
So Warren's paying $3b (?) and getting $6 bil (?) in credits over a period of years. A good thing when you own a profitable railroad. Warrens' supposed to be a good guy. Looks like he is playing rough.
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Although my knee-jerk (appropriate word when discussing WB and GS) is to jump on Lionhead's argument -vote with your pocket book as they say and stop buying BH's products, but the greed in me says, shouldn't we all be loading up on BH and GS sisnce they appear to be getting all the deals? (Maybe I should add GE to that mix as well!)
The low income housing tax credit (LIHTCs) was created by the Tax Reform Act of 1986 and it assists developers of "affordable" apartments for households making 60% or less of area median income (as determined by HUD) adjusted for household size. Developers of these affordable apartments sell the LIHTCs and use the sale proceeds as equity in their developments. Owning the LIHTCs allows the tax benefits of property losses, rapid depreciation, and some start up cost amortization to flow through to the LIHTC buyer. The biggest buyers of LIHTCs have been banks and insurance companies. And as we all know, those buyers don't have the tax liabilities they used to so the price developers can get for LIHTCs has collapsed. As for anyone arguing that the GS/Berkshire purchase of Fannie's LIHTCs will restore their pricing and restart the LIHTC project development activity, that is crazy. (1) The federal government already has a program in place to replace LIHTC equity in deal sructures with direct federal government subsidy. This subsidy is being doled out by local governments who are easier to deal with than LIHTC syndicators. (2) When I got into the LIHTC business in 1993 purchasers were getting an IRR of approximately 20% ($.51 per dollar of LIHTC), when I got laid off in 2008, the IRR was down to approximately 6% ($.99 per dollar of LIHTC in rehab deals, even higher for new construction). I'm doubting that the GS/Berkshire purchasing price will provide either of them with an IRR as low as 6%. (3) LIHTC projects usually have regular bank multifamily mortgages, which will have very strict underwriting standards in this climate. Demand for all CRE, including market rate apartments and affordable apartments, is down almost everywhere in the country. An apartment model has a 2% rent inflation factor year to year. That can't be modeled when demand is slackening with higher unemployment and overbuilding at all price/affordability levels. Those same financial institutions that don't have any earnings also aren't making any multifamily mortgage loans. (4) LIHTCs are a "production" credit, meaning LIHTCs can't be used to offset tax liability unless an affordable development is both built and has reached a certain level of occupancy. Buying already existing LIHTCs does nothing to spur employment except for syndicators and lawyers nor does secondary market buying spur new affordable housing development. Perhaps the thinking is other non-financial industry companies will step up and start buying LIHTCs following the GS/Berkshire example and that demand can be created because of CFO fears of much higher future tax liabilities. Microsoft has been a buyer and so have some of the oil companies. But as I said earlier, nobody is making multifamily mortgage loans and almost every industry is seeing lower earnings and hence lower tax liabilities. So there may not not be strong demand for LIHTCs.
Do as I say. Not as I do.
I should add, I love that the FHFA already approved this transaction. What a bunch of scumballs there.
Luckily, I have a funny feeling the FHFA won't be around much longer after Fannie/Freddie are rolled into the FHA.
could Buffet have made his money like Rajaratnam?
BK, thanks for bringing this to our attention. My response, simple, I will not purchase any product or service controlled by Berkshire Hathaway ever again. Now, if millions of folks would do that, Buffett would feel our pain right in his overflowing wallet. Geico, forget it; Dairy Queen, no thanks, Zale jewelers, nope, no thank you Warren. You're an asshole.
Since this transaction has ZERO bona fide economic benefit and is PURELY to reduce taxes, it should be regarded as a SHAM transaction and FRAUDULENT on its face.
The bloodhounds at the IRS, as an arm of the Treasury Dept. will be all over this one, uh, wait... -- TREASURY?! -- Oh shit. Never mind. Yep, got a green light on this one. Nothing to see here citizen. Looks good to me.
These are not the drones you're looking for.
UThese are not the drones we are looking for, move along.
Okay...ummm US Government...quick tip. Goldman Sachs and Buffett are wayyyyyy fucking smarter than you. They are ripping you off...they are good at doing that. That is how they make money. And if they rip you off...they rip us off. If these fuckers show up at the door with a "deal", then tell them to F off...got it!?!? They are too smart for you idiots...are you also too stupid to understand this as well or is it that you understand this and you just like to give money away to these rats?
Oh...sorry, I forgot, I am not really talking to the Government...they won't listen to me...I am just ranting again on a post. Too bad we can't do shit about getting constantly ripped off and lied to. Ho-hum...back to just getting fucked again. Yeah America!
Buffett hates and fears unregulated derivatives, (but he wrote bucket loads of non-collateralized CDS's and took in a ton of premium back before the crash.) He bemoans the unfairness of the tax system, (but this multi-billionaire gladly buys credits at the expense of the taxpayer.) "Took a chance" on Goldman Sachs (just before GS got a package of $56.7 billion plus money at 0% plus draft notes on every policy ever to come plus the option of editing that policy). He believes in America. He's a kind of good ole country boy who just got lucky and made a few dollars by being smart. Grandfather type.
If ever there was someone for whom the Keyser Soze quote about the devil's greatest trick were apt, it is Warren Buffett.
Oracle of Omaha
He has had a great PR run. You have to admit that.
Because he is not "from NY" he is not like the pillaging vampires. Oh no, he is from Omaha and just invests the good old fashioned way.
Fuck Buffet. Another deal that illustrates the inner workings of a fascist regime.
+1000
He is a hypocrite, made his special deals and then shilled for TARP. What a guy!
Buffett hates and fears unregulated derivatives, (but he wrote bucket loads of non-collateralized CDS's and took in a ton of premium back before the crash.) He bemoans the unfairness of the tax system, (but this multi-billionaire gladly buys credits at the expense of the taxpayer.) "Took a chance" on Goldman Sachs (just before GS got a package of $56.7 billion plus money at 0% plus draft notes on every policy ever to come plus the option of editing that policy). He believes in America. He's a kind of good ole country boy who just got lucky and made a few dollars by being smart. Grandfather type.
If ever there was someone for whom the Keyser Soze quote about the devil's greatest trick were apt, it is Warren Buffett.
If this is the case, then it is time to revolt. Screw the pigs who are screwing us. Bring on the revolution.
Hmm, wonder if Paulson had this in mind when he took down Fannie and Freddie.
The Atlantic had an article on the mechanics of this scheme
http://business.theatlantic.com/2009/11/goldmans_attempt_to_buy_fannies_...
as did Ritholtz
http://www.ritholtz.com/blog/2009/11/worst-idea-of-2009/
indeed, warren is a snake. what a surprise he put $10 billion into GS. A snake, a very very clever bastard snake
Buffet clearly believes in a depression (buying a railroad with stable cash flows) and also a much higher tax environment in the future (buying tax write offs or net operating loss carry forward tax credit offsets that will never be used by this entity because it will never show a profit). Usually this works in a full acquisition, haven't heard of it used like this before as some kind of, well for a lack of a better word it looks like another swap.
Apocalypse / We believe you to be correct. It is a pheusdo swap. And, creatively employed in this instance. Also, upon analysis of Buffet's BN deal, we see the transaction as a "defensive play" on the economy. Everyone above presents good arguments.
Goldman and Buffett wouldn't buy these credits unless they would save more on taxes than they paid for the credits to Fannie Mae. The payment to Fannie Mae is effectively a payment to the government now. So this proposed transaction would be nothing more than the government agreeing to reduce the tax liability of Goldman and Berkshire Hathaway by the difference between what they paid for the credits and what they saved in taxes. A complete screw job for the taxpayers, coming in part from folksy old Warren who says rich people like him aren't taxed heavily enough and his secretary pays higher tax rates on her income than he does.
You are exactly correct. This transaction is just plain theft. The giant omission in this story is who is getting the end proceeds of this corrupt transaction....certainly not the taxpayers...could it be Buffett and the Giant Squid are getting reimbursed for providing the Gov liquidity during the height of the crisis? Did they conspire earlier to commit these sham transactions? Where is the open auction for these valuable tax credits? Follow the money, these crooks are stealing right before your eyes and the people roll over and do nothing! Sickening
I wanted to comment on your incomplete and flawed thought process. You are completely leaving out several key stakeholders in the Low Income Housing Market. This is housing for families that can’t afford to rent market rate homes, such as senior citizens or very low income America. Maybe you’re not the type to care about old or homeless people, but there is an entire industry complete with developers, contractors, property managers, and syndicators which has effectively halted as a result of the dislocation in this market. If this transaction goes through, it will likely jump start the primary market and bring private capital to this much needed sector of multi-family housing and create jobs for Americans in the process. If you know what the GO Zone is - some of this capital will be going towards rebuilding homes that were destroyed by hurricane Katrina. As far as reducing Tax Liability, capital is paid UP FRONT for benefits that are arrive in a stream for TEN YEARS. This has always been the purpose of the Low Income Housing Tax Credit Program: to put private capital at risk for a long term benefit to Society, which would otherwise be impossible as the underlying cash flows do not make economic sense.
Finally, if you read the above section from the 10Q it reads loud and clear: if the Treasury does not approve this transaction, then FNMA will take an additional 5.2 billion dollar loss – which is clearly not in the interest of the taxpayer.
It looks like Treasury also has an incomplete and flawed thought process as they killed this attempt by Goldman and Buffett to rip off U.S. taxpayers.
http://online.wsj.com/article/SB125754828200334693.html
Treasury Blocks the Sale of Tax Credits by Fannie
But 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," an administration official said in a statement.
You would need to have a thought process for it to be flawed. The discussion here isn't whether Fannie helps low income people or not, it's about whether Fannie selling tax credits to Goldman and Buffett would net more or less money for the U.S. taxpayers.
Whether Fannie writes off the $5.2 billion is irrelevant as it would be a non-cash expense.
I'd like to comment on your incomplete and flawed thought process... the tax credits are for deals already completed. Probably a bunch of people that have already been foreclosed. on. There will not be any "jump start" of the housing industry. If the credits just expire, the treasury saves 5.2 billion. The markets won't clear till the government stops distorting the markets. If the government gave a sh*t about helping the needy, they'd let prices correct. That will make housing more affordable than any tax credits.
This is about rewarding insiders. It's grossly unethical for Buffet, a sometime Obama economic adviser, to get the inside track on buying an asset for pennies on the dollar.
What are you talking about? There will be no new capital committed - they are talking about selling their equity in investments already made. As you say yourself, the capital is paid up front, what they are selling is the tax benefits. It's not like GS is committing new money to Low Income housing.
As for FNMA losing 5.2B, Treasury's other choice is to lose more than that in tax revenue that otherwise would have been collected from GS. The taxpayer is financially better off having to put more money into FNMA.
Why is it you GS shills always post here as Anonymous?
Why do you post anonymously?
Nice straw man argument, if you don't agree with this "you are anti old people or anti homeless".
This smacks of a lobbyist or an employee of Goldman Sachs or Berkshire Hathaway. That's what is great about this site, trolls show their cards - expect this to be the spin!
I wanted to comment on your incomplete and flawed thought process. You are completely leaving out several key stakeholders in the Low Income Housing Market. This is housing for families that can’t afford to rent market rate homes, such as senior citizens or very low income America. Maybe you’re not the type to care about old or homeless people, but there is an entire industry complete with developers, contractors, property managers, and syndicators which has effectively halted as a result of the dislocation in this market. If this transaction goes through, it will likely jump start the primary market and bring private capital to this much needed sector of multi-family housing and create jobs for Americans in the process. If you know what the GO Zone is - some of this capital will be going towards rebuilding homes that were destroyed by hurricane Katrina. As far as reducing Tax Liability, capital is paid UP FRONT for benefits that are arrive in a stream for TEN YEARS. This has always been the purpose of the Low Income Housing Tax Credit Program: to put private capital at risk for a long term benefit to Society, which would otherwise be impossible as the underlying cash flows do not make economic sense.
Finally, if you read the above section from the 10Q it reads loud and clear: if the Treasury does not approve this transaction, then FNMA will take an additional 5.2 billion dollar loss – which is clearly not in the interest of the taxpayer.
Fannie has LIHTC. This means "low income housing tax credit". They made loans that benefited this housing. In return they got a tax credit. This happened some time ago. It is silly because Fannie has no income to shelter. This is a way that congress funded (off balance sheet) its housing objectives.
These tax credits can be transferred. It is a complicated transaction, enter GS and Buffett.
This story is out all over now. I was trying to type fast.
The link to Bloomberg's discussion on this:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.e7XYSaGZmY
bk
The fact that these credits can be sold smells bad. This is a bullshit loophole.
They (tried hard) stopped the practice of purchasing entities for the use of their NOL carryforwards quite some time ago. This is the same type of avoidance scheme.
Yell at me if you want.
Do it....then leak.
Pardon me. Warren B. is a little old and gamey for this kind of sleazy crap.
If the credits were for sale, were they posted and put thru the vetting process of an auction? Hell, No! Just more bucks for the insiders!
Thanks Bruce, very interesting.
Sorry Bruce, I am lost. Can you give me a little more background on this?
thank you,
Leo