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Backdoor Fannie Mae Subsidy Could Hit Taxpayers

Stocks in this article: FNMA FMCC AIG GM C

Taxpayers may be getting paid on crisis-time bailouts in one pocket and essentially having that money plucked from another by way of lost tax revenue, but there may be benefits to Treasury's actions regarding DTAs.

In the case of AIG, Treasury converted preferred shares to non-voting common stock and made a significant profit when it sold off those shares as the insurance giant's financial position improved.

While Treasury is still deeply in the red on its GM shares, the automaker's DTA can only help taxpayers in a politically-charged quest to break even on the bailout.

Still there are risks for Fannie in trying to convert its deferred tax valuation to a balance sheet boosting asset. There's uncertainty as to whether the company will exist in the future -- a scenario that obviously would put future profitability at risk.

"Fannie Mae would also have to take into account the possibility that it will be liquidated and replaced by another instrumentality that would not succeed to FNMA's losses and deductions. If FNMA concludes that it only has a limited life, this would obviously inform its decision whether or not to truncate its valuation allowance," writes Willens.

As of Sept. 30, Fannie had paid the Treasury $28.5 billion in dividends.

Fannie reported a third-quarter profit of $1.8 billion, which was the company's third consecutive profit. Earnings for the first three quarters of 2012 were $9.7 billion, compared to a net loss of $14.4 billion during the first three quarters of 2011. The company was also able to pay its third-quarter dividend of $2.9 billion in the Treasury's preferred shares, without resorting to further government borrowings.

" Since this is an accounting issue between the company, its auditors and its regulator, we're not weighing in," Anthony Coley, a Treasury spokesperson said in an e-mail.

Voicemails and emails left with Fannie Mae and Freddie Mac went unreturned.

For more on Fannie Mae, see why the smart money sticks to GSE preferred shares.

-- Written by Antoine Gara in New York

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