Politics, Not Math, Drive Fannie Mae Earnings

NEW YORK ( TheStreet) -- Fannie Mae ( FNMA) reported a record $7.6 billion profit for the fourth quarter, but the government-owned mortgage guarantor could easily have announced a figure of $66.5 billion.

The $58.9 billion difference consists of a something known to tax geeks as a valuation allowance on deferred tax assets. Essentially these are tax credits Fannie accumulated during several years of multibillion dollar losses while it bore the brunt of the subprime housing crisis.

Accounting rules provide some flexibility regarding when these credits can be counted as income. Much depends upon management estimates of future profits, and we all know those estimates often tend toward the optimistic. Citigroup ( C), for example, took a fair amount of heat from Mike Mayo in 2009, when the well-known analyst argued the bank was too aggressive in its assessment of when it would be able to make use of its tax credits.

But corporate tax consultant Robert Willens, who joined Mayo in criticizing Citigroup for being too aggressive, believes Fannie Mae is erring on the side of caution.

"If it was just purely accounting I think the factors would line up in favor of releasing at least part of the valuation allowance," Willens said.

So why are Fannie Mae executives being so shy?

Probably because many powerful people in Washington would prefer not to draw too much attention to Fannie's profits, nor those of Freddie Mac ( FMCC).

The more money these Government-sponsored enterprises (GSEs) make, the more elected officials have to play with. If the public starts paying attention, however, that becomes more difficult.

Fannie still owes taxpayers $117 billion, a number that hasn't shrunk even though it has paid $35.6 billion in dividends back to the Treasury. When I interviewed former House Financial Services Chairman Barney Frank recently, he thought the debts were in the "hundreds of billions."

But the government officials who keep close tabs on Fannie realize what the numbers truly are. They also know that there is increasing concern that the profits of the GSEs will be used as a private piggy bank. In May, Senator Dianne Feinstein (D-Calif.) proposed using increases in the insurance fee charged by Fannie and Freddie to help "underwater" home owners refinance their mortgages. In December, the House of Representatives voted to use fee increases to pay for a student visa program.

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