Goldman Mulls Fannie Tax Credits

Goldman Sachs Group Inc. (GS - Analyst Report) is contemplating buying tax credits from Fannie Mae (FNM - Snapshot Report). However, it may be reasonable to assume that the U.S. Treasury may not approve of the deal.

Goldman hopes to receive approval this week for $1 billion worth of tax credits. Tax credits are incentives designed to bring more investment to low-income housing developments. This would help the company reduce its tax bill as well as bring some much-needed financial relief to Fannie Mae.

While financial details of the proposed transaction are not disclosed, Goldman could arrange other investors for the deal as well.

The Obama Administration, however, is opposed to the deal, as it will reduce Goldman's tax bill at a time when Wall Street is already facing intense public scrutiny.

Fannie Mae, a government-controlled mortgage financier, could get financial relief if Goldman bought the tax credits. As the housing market collapsed and mortgage defaults skyrocketed, the company faced billions of dollars in losses and was unable to remain afloat without major government support.

The Treasury Department had purchased $45.9 billion of preferred stock in Fannie Mae last year to support the troubled firm, giving taxpayers a substantial stake. The company continues to need funding from the government and its operations are closely monitored by its regulator.

Goldman reported third quarter 2009 (ended Sept. 25, 2009) earnings of $5.25 per share -- significantly ahead of the Zacks Consensus Estimate of $4.13.

Results reflected strong performance in the trading operations, which offset the decrease in investment banking division. The company also reported a drop in expenses on a sequential basis.

Goldman’s well-diversified business model coupled with a more favorable operating environment led to this strong growth. We think Goldman’s sturdy capital and liquidity will lead to increased profitability from newer opportunities once the economy recovers.

We continue to have an Outperform recommendation on the stock.