2 July 2009
“Build America Bonds” Paying a Shocking Premium to Corporates

The “Build America Bonds” were created by Bill S.238 called “The Build America Bonds Act of 2009 which provides $50 billion of federal taxpayer funds to subsidize state and local government tax free bonds in support of ’shovel ready’ infrastructure projects.

The U.S. Government gives the issuing municipality or state a 35% rebate on the interest that the issuer pays to the bond holders. This is a huge benefit for local governments.

We have not yet found out why, but it is apparently giving a big benefit to the buyers of the bonds who are getting an income stream at well below market prices for comparable issues. In some cases the BAB bonds are pricing at 149 basis points over comparably rated corporate bonds.

Where is the inefficiency coming from in this bond offering? Who is taking the differential, the vigorish, being granted to the state and cities? Who are the underwriters and the market makers? Who are the big market makers besides Pimco? What are the fee structures being charged compared to the overall bond market?

Meredith Whitney, star analyst that she is, was the closest with her $4.65 prediction. She thinks the stock has lots of room to run, notes Fortune.
Goldman, in her mind, will surf the economic woes now roiling the country. Goldman is a top underwriter of municipal bonds and the No. 1 underwriter of Build America Bonds. “These are a new type of municipal bond, part of the Obama administration’s $787 billion stimulus plan. Cities, states, universities and government entities use BABs, as they’re known, to finance infrastructure projects. This is a potential $50 billion annual market, Whitney says, and Goldman currently holds a 25 percent share,” reports a Fortune article.

Jessie’s Cafe Americain
Oh now it all makes sense. Droit de Seigneur.

For loans we isssue a credit card. For checks we issue a debit card. No paper checks, no paper anything.

What was the FEC and the FED and Congress doing when these con men were creating these “innovations”? Did absolutely nobody suggest that it sure seemed like Wall Street sharpies were coming up with a thousand different ways to fleece the rubes? Is it surprising that these “innovations” came to be immediately after a decade in US history when the biggest number of regular working people started participating in the market? Is it surprising that these “innovations” first appeared just as the dot.com boom was spiraling into a fiery crash?

I’m starting to think that Matt Tiabbi actually let Goldman Sachs off way too easy in his outstanding Rolling Stone article. I need to take a look at the University of Chicago School of Business course catalog to see if they’re also teaching how to shave dice and deal from the bottom of the deck. I’ve always wanted to learn how to set up a three-card monte game.

So ARS got hit for much the same reason that housing did. Both represented bubbles and when the one burst, the other soon followed. Were investors taken for a ride? Yes. Were they greedy? Also yes. The central lesson here is once again that financial innovation is really about separating investors from their money, the savvier the investor the more complicated the innovation is all.

During the week of the A.I.G. bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives. On Sept. 17, the day Mr. Paulson secured his waivers, he and Mr. Blankfein spoke five times. Two of the calls occurred before Mr. Paulson’s waivers were granted…

Mr. Paulson’s schedules from 2007 and 2008 show that he spoke with Mr. Blankfein, who was his successor as Goldman’s chief, 26 times before receiving a waiver.

On the morning of Sept. 16, 2008, the day the A.I.G. rescue was announced, Mr. Paulson’s calendars show that he took a call from Mr. Blankfein at 9:40 a.m. Mr. Paulson received the ethics waiver regarding contacts with Goldman between 2:30 and 3 the next afternoon. According to his calendar, he called Mr. Blankfein five times that day…

According to the schedules, Mr. Paulson’s contacts with Mr. Blankfein began even before the height of the crisis last fall. During August 2007, for example, when the market for asset-backed commercial paper was seizing up, Mr. Paulson spoke with Mr. Blankfein 13 times. Mr. Paulson placed 12 of those calls.

More proof of the conspiracy is Paulson’s original three page plan. He wanted to give himself absolute power to loot the treasury without any penalties.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

The S&L crisis/scandal was a rounding error compared to this debacle, and it was littered with investigations and indictments.