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Who Should Get Fannie Mae’s Tax Credits?

By Michael Cohn
November 4, 2009

Now that Warren Buffett has joined Goldman Sachs in a bid for $3 billion worth of tax credits from the government-seized mortgage holder Fannie Mae, there seems to be a new twist on the definition of “troubled assets.”

All those failed mortgages that sunk Fannie Mae have produced an odd situation in which the company cannot use the tax credits directly. Instead, it would have to take losses each quarter as the value of them falls further and further, as The Wall Street Journal pointed out.

But those tax credits are worth a fortune to a company like Goldman, whose record profits mean lots of taxes to pay unless it finds a way to offset them. Hence the attractiveness of Fannie’s tax credits. The bankers at Goldman were smart enough to recognize the value of those tax credits, and Buffett also knows a good thing when he sees it. Now Goldman and Buffett’s company Berkshire Hathaway will be bidding for the tax credits.

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Paradoxically the windfall for Fannie Mae will help it pay back the government the billions in dollars it got from the financial bailout. On the other hand, when Goldman Sachs or Berkshire Hathaway claim the tax credits, the government will then lose the money in tax revenue. Depending on how the deal comes out, the government could end up losing more money than it gets back from Fannie. Such are the perils of our modern bailed-out economy.

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