Goldman Sachs: Yes, Build America Bonds Are Good for Transport — And Us

Goldman Sachs today confirmed that the
taxpayer-subsidized debt offering known as Build
America Bonds
(BABs), which have helped several urban transit
agencies and state DOTs pay for new projects since last year, tend to
result in higher underwriting fees for Wall Street banks than most
tax-exempt municipal bonds.

MI_BB959A_BUILD_NS_20100309185227.gif(Chart: WSJ)

Responding
to an
inquiry
from Sen. Chuck Grassley (R-IA), Goldman CEO Lloyd
Blankfein said that his firm’s underwriting profits for BABs have ranged
from 0.6 percent to 0.875 percent of the borrowed amount, a level
similar to corporate bonds with higher, "investment-grade" ratings.

Blankfein estimated underwriting profits for tax-exempt municipal
bonds, or "munis" — which cities and states have relied on for the bulk
of past infrastructure projects — at between 0.5 percent and 0.6
percent of the borrowed amount.

Goldman’s response comes on the heels of a Wall
Street Journal report
that revealed underwriting fees for BABs
issued to fund Washington D.C.’s Silver Line transit extension and San
Francisco’s Bay Bridge repair work.

A transportation official working on the latter project told the
Journal that underwriting fees for the Bay Bridge BABs were
significantly higher than those for tax-exempt munis.

Blankfein defended the higher fees in a letter to Grassley, noting
that BABs are a relatively new program created by last year’s economic
stimulus law. "As BABs have become better known to investors,
underwriting fees have come down," the controversial
CEO
wrote.

Grassley was unmoved by the firm’s response and issued a statement
warning Democrats about the BAB expansions included in a
transportation-centric jobs
bill
that is set for final passage this week.

“Build America Bonds are portrayed as an easy way to help school
kids and
green energy," the senator said. "What’s left out is that this is a
spending program
disguised as a tax cut, getting bigger each year, and Wall Street takes a
healthy share."

It should be noted that Grassley, the senior Republican on the
tax-writing Senate Finance Committee, endorsed an expansion of BABs in
an early version of the current jobs bill that he drafted with Finance
chief Max Baucus (D-MT). However, the House has since expanded the
bill’s level of taxpayer subsidy for clean-energy and
school-construction BABs to more than double the level proposed in
President Obama’s latest budget.

One issue that went unaddressed in Grassley’s inquiry was the level
of negotiated yield for BAB offerings, which determines how much money
transit agencies and state DOTs can raise from their debt sales. A
Bloomberg investigation last spring found that New York City’s
Metropolitan Transportation Authority could have raised $9 million more
to plug its budget gap by lowering the yield for its BAB sale by 0.1
percent.

  • patrick

    what’s the difference between a Build America Bond & a municipal bond?

  • JohnB

    Patrick,

    The BAB bonds came out of the 08/09 financial crisis. as part of trying to stimulate the economy, the feds allowed a new type of Municipal bond that pays taxable interest rather than the usual tax-free interest.

    Such bonds are more attractive to tax-exempt investors who otherwise would have no incentive to buy muni bonds.

    The Feds subsidize the municipality so that the effective interest rate they pay is the same as a regular muni.

    So in basic terms it is free money from the Feds to the Muni’s. (Well, not really free, you’re paying for it through your federal tax)

    But of course it’s new, more complex and so you need a IB to structure and market it – hence GS (and others) making a crust on it which, in truth, they do on all other muni investments anyway.

  • Peter S

    you must pay for the services rendered!

  • patrick

    thanks John, I understand the difference now. I’m not a fan of GS, but it seems reasonable to charge higher rates for a new product, I suspect other IBs are doing the same.

  • JohnB

    Patrick,

    BAB’s are new and so a bigger margin is reasonable. Also, we don’t know how long the BAB’s will be around.

    But if they become well-established and permanent, I see no reason why the spreads shouldn’t normalize.

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