Build America Bonds to cost the federal government (a.k.a. taxpayers) $36 billion through 2019

By Esmé E. Deprez

Aug. 20 (Bloomberg) -- Build America Bonds, the fastest- growing part of the $2.8 trillion municipal debt market, will cost the federal government $36 billion through 2019, $6 billion more than forecast, the Congressional Budget Office said.

The U.S. subsidizes 35 percent of the interest cost of the taxable Build America securities, which were authorized under the economic stimulus legislation signed by President Barack Obama last year. Issuers have sold about $128.5 billion of the debt, according to data compiled by Bloomberg.

Federal spending on Build Americas will rise to $2 billion for the 2010 fiscal year ending Sept. 30, from less than $500 million in 2009, the non-partisan agency said yesterday in its semi-annual budget report. From 2009 to 2019, the total cost will grow to $36 billion, up from a $30 billion estimate in January. The Bond Buyer newspaper reported the findings earlier.

According to the CBO’s March analysis of Obama’s fiscal 2011 budget, his plan to expand and permanently extend the program -- as well as lower the subsidy to 28 percent -- would increase revenue by $80 billion over the 2011-2020 period. More than two-thirds of the Build America program’s cost is currently offset by higher tax revenue, according to the CBO.

The House of Representatives postponed on July 29 a vote to extend the Build America program for two years beyond its Dec. 31 expiration. Two previous extensions sought by the House were killed in the Senate.

Independent researcher CreditSights Inc. forecast on July 29 that total issuance would reach $165 billion by year-end, as borrowers come to market before the program is set to cease.

Build Americas yield about 5.63 percent on average, according to the Wells Fargo Build America Bond index. The index has an average maturity of 28.8 years and an average credit rating of Aa3 and AA- from Moody’s and Standard and Poor's, respectively. Both ratings are the fourth-highest investment grades.

Grandpa

Build America Bonds is synonymous with Build American Banks...the U.S. government continues to afford the Wall Street Banks with unbelievably profitable income producing opportunities while the U.S. taxpayer continues to struggle and our children and grandchildren are left with the financial shortfall. The following article albeit 5 months old, remains relevant.

CBO projects a $36 billion hit to the federal government while Goldman Sachs booked $55.7 million of Build America Bond fees as of March 2010.

By Michael McDonald
March 10 (Bloomberg) -- Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, has made $55.7 million from the sale of $36.4 billion of Build America Bonds, about a third of the fees it earned from its municipal business, it said in response to queries from Iowa Senator Charles Grassley.

The effort to underwrite the federally subsidized municipal bonds is “highly competitive” with “over 10 major firms” vying for the business, Goldman Chairman Lloyd Blankfein wrote in a letter dated March 1 to the top Republican on the U.S. Senate Finance Committee. Grassley said in a letter to Blankfein last month that he is “concerned that American taxpayers are subsidizing larger underwriting fees for Wall Street investment banks.”

Congress created the Build America Bond program last year as part of the $862 billion American Recovery and Reinvestment Act in an effort to revive the $2.8 trillion municipal bond market. The U.S. Treasury pays 35 percent of the interest cost if states and local governments sell the taxable securities for their capital projects instead of tax-exempt debt.

Goldman, which got $10 billion in taxpayer bailout money amid the credit crisis in 2008, was paid $54 million to lead underwrite or help sell $34 billion of the bonds and $1.7 million to serve as an adviser on a separate $2.4 billion of Build America Bond sales, the bank told Grassley’s office in a second communication dated March 9. Jill Gerber, a Grassley spokeswoman, confirmed the content of the letters.

Borrowers Paid More

Blankfein replied to Grassley that the bank is paid to “educate the market about the issuer and the securities they are offering,” as well as “assume the risk of underwriting.” He said that as Build America Bonds “have become better known to investors, underwriting fees have come down.”

The bonds are marketed to investors that typically don’t buy municipal securities because they don’t need tax-exempt income.

Goldman’s Fees

Goldman charges a fee of between 0.6 percent and 0.875 percent of the borrowed amount of money to underwrite Build America Bonds, compared with 0.875 percent for investment-grade corporate bonds and 0.5 percent to 0.625 percent for tax-exempt municipal securities, Blankfein said. Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment further.

The bank earned a total of $149.7 million underwriting and advising on the sale of municipal securities, including Build America Bonds, since the beginning of last year, according to information it provided Grassley’s office. It generated $885 million in revenue from underwriting all types of debt in the final nine months of 2009, or 2.5 percent of the firm’s $35.75 billion in total net revenue in the April through December period, according to company filings.

President Barack Obama last month proposed extending and expanding the program, which expires at the end of this year. There have been $84 billion of the securities sold since last April, according to data compiled by Bloomberg.

Goldman Sachs, which paid back the bailout last year, was the top underwriter as of Dec. 31 for debt issued under the stimulus program, followed by banks including JPMorgan Chase & Co., Bank of America Corp., Morgan Stanley, Citigroup Inc. and Barclays Plc, according to data compiled by Thomson Reuters. Goldman Sachs led a group selling $2.6 billion of securities for Georgia’s Municipal Electric Authority this month.