"Stupidest Lawsuit Ever Has Us Suing Ourselves"

[Professor S]

Never let it be said that Bailout Nation doesn’t have a sense of humor. It would be only a slight hyperbole to say this may be the stupidest lawsuit ever.

Here’s what happened. In July the Internal Revenue Service told Freddie Mac, the congressionally chartered housing financier, that it owed $3 billion of back taxes and penalties for the years 1998 through 2005. Rather than pay up, the McLean, Virginia-based company sued the IRS on Oct. 22 in U.S. Tax Court to contest its claims.

Before Freddie Mac could do that, it had to seek written permission from its conservator, the Federal Housing Finance Agency. FHFA, whose mandate is supposed to include looking out for taxpayers, consented. Freddie Mac disclosed the suit last week in a footnote to its third-quarter financial report.

Talk about biting the hand that feeds you. Here we have a government-sponsored enterprise -- which depends on Treasury’s financial support to remain solvent -- suing an arm of the Treasury Department. Some thanks this is. To date, Treasury has injected about $64 billion into Freddie Mac and collected $8.4 billion of cash dividends on its senior preferred stock in the company.

The Treasury Department also holds a warrant to buy 79.9 percent of the company’s common stock for a nominal price. So Freddie Mac can’t claim it’s simply protecting shareholders by taking on the IRS. Under its conservatorship, the company’s board answers only to the FHFA, which has complete authority over Freddie Mac’s affairs.

To me this is a perfect example of the absurdity of having such a powerful Federal government. In the end, the bureaucracy begins to consume itself because an attempt to homogenize something that large causes internal breaks to form. What we are left with is a government that is an unintended satire of itself.


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