Build America Bonds (a.k.a Build Wall Street Bonds)

Wall Street Journal:
Wall Street firms have received fees exceeding $1 billion in less than a year selling "Build America Bonds" meant to spur jobs in struggling cities, often charging municipalities higher costs than for traditional bond deals.

These new bonds were rolled out in April 2009 under President Obama's economic stimulus plan to create jobs building roads, schools and hospitals. Unlike conventional municipal debt, the new bonds are taxable and generally carry higher interest rates.

The U.S. pays 35% of the interest, so the bonds have enabled local governments to borrow during a credit crunch and save money at the same time, making the higher costs a wash for them.

The Wall Street fees are "surprisingly high," says Edward Prescott, a Nobel-prize winning economist at the Federal Reserve Bank of Minneapolis and a professor at Arizona State University.

The banks confirm charging higher Build America fees, but say the costs are coming down as the bonds become more popular. Bank officials say the higher fees are justified because they are working harder to sell the bonds to investors who wouldn't traditionally buy municipal debt, such as pension funds, insurance companies and foreign investors.

On average, the underwriting fees for Build America Bonds are $8.20 per $1,000, according to Thomson Reuters. By comparison, the standard fee for tax-exempt issues is $5 to $6 per $1,000, according to Wall Street banks. Thomson Reuters says 984 deals have been done since April. Underwriting fees were disclosed in just two-thirds of those, totaling nearly $1 billion. Spokesmen for all the banks declined to comment.

The Treasury Department says that Build America fees have dropped and are becoming more comparable to tax-exempt fees.

Link to complete Wall Street Journal Article:
Build America Bonds

Once again, the U.S. Government assures that their banking buddies on Wall Street are well taken care of. Our government implements yet another debt program, distributes the product through their biggest contributors ensuring them of another no risk income stream.

Wall Street displays their appreciation for the opportunity by charging a fee 37% to 64% greater than similar debt products. For their efforts, they pocket $1 billion of income for just under a year’s worth of effort.

$78 billion of bonds have been issued by the end of February and banks believe another $150 billion will be issued by the end of 2010. Banks bring in $1 billion on $78 billion so hooray for Wall Street as they have close to another $1 billion within their grasp.

Our children and grandchildren are again stuck with covering the 35% of the interest expense and yet the administration has proposed to make the program permanent (due to expire 12/31/10) and cover 28% of the interest versus 35%.