(Washington, D.C.)  The Council for Citizens Against Government Waste (CCAGW) today reiterated its call for swift enactment of substantive government-sponsored enterprise (GSE) reforms in the wake of revelations by the Wall Street Journal that housing giant Fannie Mae has admitted to having a financial interest in a synthetic fuels company in order to reduce its taxable income. 

“This story raises serious questions about the manner in which Fannie Mae is leveraging its charter and the valuable privileges Congress granted it.  These revelations merit a full investigation by Congress and Fannie Mae’s regulators,” said CCAGW Director of Special Projects Leslie K. Paige.  “The GSEs were charged with a public mission in exchange for tax exemptions, disclosure exemptions, anti-trust exemptions and a raft of other benefits that are today worth more than $10.6 billion annually.  It is absolutely outrageous that Fannie Mae, a GSE that is already endowed with tens of billions in implicit subsidies, has used that financial windfall to invest in a synthetic fuel company in order to get even more lucrative tax breaks.  It is even more egregious since the IRS has concerns about abuses of this synthetic fuel tax break.  How does this investment help low-income Americans buy a home?  What it does is allow a huge company that has become rich on taxpayer-backed subsides to get even richer.  Where are Fannie’s regulators, OFHEO and the Department of Housing and Urban Development?  This new information indicates the need for an immediate change in the oversight structure on the activities of all the nation’s GSEs.” 

The synthetic fuel tax credit was enacted during the Carter Administration.  It is a tax subsidy to encourage financial involvement in commercial projects and ventures that may otherwise be unattractive to investors.  It applies not only to solid synthetic fuels produced from coal, but to liquids and gases produced from coal, municipal solid waste disposal facilities, oil derived from shale, etc.  Spokespersons for Fannie Mae have responded to the story by claiming that the investments have had a minimal impact on their effective tax rate and are “nonmaterial contributors to Fannie Mae's performance.”

“Those statements just won’t wash,” said Paige.  “If the investments didn’t contribute to the company’s bottom line and didn’t reduce its tax rate to any noteworthy extent, Congress and the regulators ought to be asking Fannie Mae executives why they invested in the first place.  Since there is virtually no mission regulator that might have legitimately questioned or put a stop to Fannie Mae’s partnership in this synthetic fuel corporation, what else don’t we know about the investments of Fannie Mae?  It’s time we found out,” concluded Paige. 

The August 13 Wall Street Journal story on Fannie Mae’s ownership of a synthetic fuel concern comes in the midst of ongoing revelations related to Freddie Mac’s accounting scandal, questionable fund-raising activities by some of Freddie Mac’s executives, and the filing of lawsuits against Freddie Mac by the states of Ohio and West Virginia.  Momentum is building in Congress to strengthen oversight of all the GSEs.  There are a total of four bills pending in the House of Representatives and one so far in the Senate, though there are reports that several other senators are considering legislative initiatives and further hearings.  The common theme among the most prominent House and Senate bills is the establishment of a new regulator with increased authority at the Treasury Department.  Another key bill, introduced by Reps. Chris Shays (R-Conn.) and Ed Markey (D-Mass.), would repeal the GSEs’ exemption from Securities and Exchange Commission (SEC) registration and disclosure laws.

“While CCAGW applauds members of both the House and the Senate for stepping up to address this important issue, SEC registration and disclosure must be a part of any worthwhile reform package,” added Paige.  “These recent revelations are only the tip of a very large iceberg.  The reality is that nobody really knows what these entities are doing, the risks they are taking, or how they are accounting for their assets.  These recent stories, coupled with the fact that the taxpayers would be called upon to bail them out in a financial crisis, ought to be lighting a fire under Congress.  It is inexcusable that the GSEs continue to be exempt from SEC disclosure.  Fannie Mae and Freddie Mac have been operating in the shadows long enough.  The veil of secrecy must be lifted.” 

The Council for Citizens Against Government Waste is the lobbying arm of Citizens Against Government Waste, the nation's largest nonpartisan, nonprofit organization dedicated to eliminating waste, fraud, abuse, and mismanagement in government.