Yesterday, the Wall Street Journal reported that Goldman Sachs is attempting to buy tax credits from Fannie Mae, the mortgage giant put into a government conservatorship last year to avoid its failure. Fannie qualifies for lots of government tax credits for its efforts to secure housing for low income Americans. But since turning a profit isn't in the cards for Fannie this year, it can't use the credit to offset taxes: you don't pay taxes on a loss. Goldman Sachs, however, has plenty of profit. So it would love to offset some of its huge tax bill. The Treasury may balk. I have a few thoughts.

First, the Treasury has said that it will only allow the purchase if it's in the best interest of taxpayers. Maybe I'm missing something, but I have trouble seeing how it could be. Goldman will only buy the credits at a discount -- there would be no point if paying full price. Without a discount it might as well just pay the taxes the credits would offset. Let's consider two scenarios:

Scenario 1: Goldman purchases the credit and pays, say, 90 cents on the dollar for a $1 billion tax credit. Fannie gets $900 million; Goldman pays $1 billion less in taxes. Since Fannie is wholly owned by Uncle Sam at this point that means the government receives a cash infusion of $900 million. Sounds great, right?

Scenario 2: Goldman doesn't purchase the credit. Instead, it has to pay the $1 billion in taxes. As a result, the government gets $1 billion. It wouldn't have gotten that in the first scenario because Goldman would have claimed a credit against those taxes.

As you can see, if Goldman doesn't buy the credit, the government gets more money, equal to whatever the discount is on the credit. Unless I'm missing something (and if anyone can see what I'm missing, please correct me), then I can't see how taxpayers would be better off if Goldman buys the credit for a discount. And I can't see why Goldman would bother buying the credit without a discount.

One argument for allowing the purchase is that it will provide Fannie with more cash and that will benefit tax payers because they will fund more mortgages. I don't see it. I stress again that the government would still have more money without selling the credit by just collecting Goldman's taxes -- so it could just give Fannie whatever cash infusion it would have got from selling the credit and keep the discount that would have padded Goldman's profits. Taxpayers are still better off without selling the credit.

I have just one final comment. If I'm missing something, and selling the tax credit would be pure gravy for the government, then the buyer shouldn't matter. Some are complaining that the government will be criticized for continuing to do business with Goldman. That's true, but it's a ridiculous reason not to act in taxpayers' best interest, if in fact selling the credit satisfies that criterion. Frankly, the way these things should be done is by bidding. And if Goldman turns out to be the highest bidder, then that's fine. Taxpayers will be better off selling it to whoever is willing to pay the most.

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