Our disloyal government

Posted by Marc Hodak on November 4, 2009 under Governance | Be the First to Comment

Fannie Mae has tax credits that are worthless to them.  As the value of these credits have declined, Fannie has had to write them down, hurting its earnings.  The government created these tax credits to spur the creation of low-income housing, so it has a public policy interest in seeing these credits utilized.  Along comes Goldman Sachs with an valuable offer to buy these credits.  Fannie is willing, but their government masters say “No, thanks,” and veto the deal.

Why would the government stop a transaction that would be good for Fannie and for low-income families?  Because it would also be good for Goldman Sachs.  And, the logic goes, it might be bad for the government because it would reduce the taxes that Goldman pays to the government over time, which is of course what the government intended when it created the tax credit.  The government wields this veto in its capacity as Fannie’s conservator, which appoints the board members.

One of the fundamental tenets of corporate governance is the duty of loyalty.  This duty states that a member of the board must place the interests of the company ahead of his or her personal interests.  In Fannie’s case, selling these tax credits to a willing buyer would be good for the company.  The fact that the board, at the behest of a politically-motivated conservator, is blocking this transaction suggests that the interests of the conservator are being placed ahead of the interests of the company.  In other words, Fannie’s government masters would rather avoid a deal with Goldman in which the bank might (gasp) make a profit, than to actually do what is best for the company they are overseeing, one they presumably wish to see back on its own feet some day.  This move makes the government as lousy fiduciary.  But we knew that already.