Treasury May Block Goldman Sachs, Fannie Mae Deal

Nov. 2, 2009— -- The Treasury Department could block a possible deal between Goldman Sachs and struggling government-backed mortgage giant Fannie Mae, a Department spokesman said today.

Goldman is reportedly in talks with Fannie to buy millions of dollars in tax credits, but Treasury stands in the way of the deal.

"Treasury is reviewing and will not let it proceed unless it is clearly in the taxpayers' interest," Treasury Department spokesman Andrew Williams said Monday.

Goldman Sachs' CEO Michael DuVally did not confirm or deny that the company was working on a deal with Fannie Mae to buy the tax credits.

Echoing Williams' comments that any deal would have to benefit taxpayers, DuVally said, ""Fannie Mae is owned and controlled by the federal government. The only basis on which approval for any transaction would be given would be if it was clearly in the taxpayers' best interest."

The potential deal could be financially beneficial, but politically damaging. While the deal would help Fannie Mae improve its precarious financial state, it could also trigger more political criticisms about the close ties between Goldman Sachs and Treasury.

Goldman Sachs Too Powerful?

Treasury Department officials were reminded of these concerns at a Congressional hearing last Wednesday, when three House lawmakers expressed concerns about the power of Goldman Sachs.

"We have this reckless and dangerous and -- and risky behavior which we have no evidence is going to cease to exist," said Rep. Luis Gutierrez, D-IL, at the House Oversight & Government Reform Committee hearing on the government's proposed resolution authority to wind down large failing firms. "So we should assume that Wall Street and those on Wall Street, the Goldman Sachs of the world, are going to continue to conduct themselves and behave as they have in the past. And so therefore, we have these new powers and this new regime to constrain them. But we also know that they are great at getting around those constraints in the past."

"We also know that -- with all due respect to you," Gutierrez said to Geithner, "that in the past, I mean, we have like one CEO of Goldman Sachs after another having your job. How do we know the next Secretary of the Treasury won't be the former CEO of Goldman Sachs as they have been in the past? They seem to be interwoven, and that's what the American public sees. They see the interconnectedness in terms of their power, their influence and always to their benefit."

"So as we see American workers' dreams of retirement being delayed and postponed and vanquished, and we see them losing their homes, as we see them losing their small businesses, we see record profits over at Goldman Sachs," said Gutierrez.

Goldman Sachs, which received and then paid back taxpayer bailout money from Treasury's $700 billion Troubled Asset Relief Program, recently said it was set to dish out a record $23 billion in bonuses this year. The bonuses prompted a swift rebuke from an Obama administration that has been trying to crack down on Wall Street pay.

"The bonuses are offensive," said David Axelrod, senior adviser to President Obama, last month on "This Week with George Stephanopoulos".

At last week's House hearing, Rep. Maxine Waters, D-CA, also expressed her displeasure with Goldman's current state after it took bailout funds last year.

"We have bailed out some of these big banks who are now richer – Goldman Sachs is a lot richer because we bailed them out," said Waters.

Rep. Paul Kanjorski, D-PA, also noted at the hearing that the government needed to have a "mechanism in place" to curb the "the unlimited power of the Goldman Sachs of the world and other huge conglomerations of money."

It is in this political climate that Treasury must now review the Goldman-Fannie deal – a climate that ultimately could prove too much to overcome.

The potential deal was first reported Sunday night by the Wall Street Journal.

ABC News' Zunaira Zaki contributed to this report.