Tax Quote of the Week
"In my own case the words of such an act as the Income Tax, for example, merely dance before my eyes in a meaningless procession; cross-reference to cross-reference, exception upon exception -- couched in abstract terms that offer no handle to seize hold of -- leave in my mind only a confused sense."
-- Judge Learned Hand
Fannie Mae $20 Billion Write-Down
The Federal National Mortgage Association (Fannie Mae) and the parallel government supported entity Freddie Mac have had combined losses of $14.9 billion during the past year. As a result of the mortgage and banking crisis, Fannie Mae and Freddie Mac were placed under government control in September.
One of the assets of Fannie Mae is deferred tax credits valued at $20 billion. However, due to large mortgage losses, it is doubtful that Fannie Mae will be able to use these tax credits. Tax credits are beneficial only if a corporation has taxable income that can be offset.
The auditors for Fannie Mae have now indicated that they will write off $20 billion in tax-related assets. On June 30, 2008, the reported equity in Fannie Mae was $41.2 billion. After the $20 billion write-down, the Fannie Mae shareholder equity will be reduced to approximately $21 billion.
Editor's Note: The $5 trillion plus mortgage portfolios of Fannie Mae and Freddie Mac have both suffered large write-downs. Auditors are now requiring Fannie Mae and Freddie Mac to publish more realistic numbers for the public. If Freddie Mac also reduces the value of tax assets by a similar amount, it may have a negative equity. As a result, the Department of Treasury may be required to provide additional funding to maintain appropriate cash reserve levels in Freddie Mac.
Stimulus II - The "Main Street" Bailout
Following the $700 billion bailout currently being administered by Treasury Secretary Hank Paulson, members of Congress are discussing another bailout informally called "Stimulus II."
At a House Ways and Means Committee hearing on October 29, 2008, witnesses discussed the potential plans for a second major bailout. The first bailout focused primarily on injecting capital into banks through a $250 billion purchase of bank stocks and spending $450 billion to acquire high-risk mortgage securities. Stimulus II differs from the first bailout in that it is likely to focus on infrastructure.
At the same Ways and Means hearing, Rep. Mike Thompson (D-CA) indicated that "Investing in infrastructure is one of the best ways to create and sustain good paying jobs. Every dollar we invest in infrastructure gives our economy a 59% return. Putting people to work fixing our aging roads and bridges and shoring up our levies will also build the foundation for future economic expansion."
Members of Congress were clearly supportive of the suggestion that a plan to spend $200 billion or more on infrastructure is appropriate at this time. Chairman Rangel added, "It is my hope, that as a result of testimony at this hearing, members of this committee would better realize how critical a new recovery effort is and that they would encourage the leadership of both parties to come back after the election and see what we can do to provide assistance to working families as well as local and state governments, as we have done for the banking and financial sectors."
Several governors or other state officials and economists appeared before the panel. Governor David Patterson (D-NY) indicated that the rescue package could "heal our fiscal condition" and avoid "irreparable damage to millions of families."
Several economists noted that the recession was likely to be more serious than the recessions in 1991 and 2002. In order to avoid deepening the recession, they suggested that a second stimulus package is appropriate.
Editor's Note: The economists indicated that even if the bailout of the banks succeeds, there will be a recession of from six to nine months. The recession could involve a decline in the USA gross domestic product of 1% to 3%. Economist Jerrod Bernstein of The Economic Policy Institute suggested that a stimulus equal to 1-2% of the gross domestic product ($150 billion to $300 billion) is the appropriate amount of spending. This amount will provide significant employment while repairing roads and bridges across the nation.
