A Closer Look at The Build America Bonds Program

A program to boost Muni's has been in the works for some time now and was originally part of the stimulus plan. So far it has been wildly successful, perhaps too much so:

NY Times----But Build America Bonds, part of President Obama’s economic stimulus plan, are also building something else: controversy.States and cities have embraced these taxable bonds to borrow money at what they assume are favorable interest rates. The federal government pays 35 percent of the interest costs on the bonds, a huge potential saving.

But questions about this multibillion-dollar program are piling up.

For one, Wall Street banks are charging larger commissions for selling Build America Bonds than they do for normal municipal bonds, increasing the costs to the states and cities. For another, the new bonds may be priced too cheaply, enabling quick-footed investors to turn a fast profit as the prices climb, but raising interest costs for taxpayers.

Those imbalances have caught the eye of the Internal Revenue Service, which is asking municipalities whether the bonds are being priced and sold correctly. Alarmed by the uncertainty, Florida, which has sold more than $1.6 billion of Build America Bonds, has retreated from the market.

As if all this were not enough, Wall Street banks — which have pocketed hundreds of millions of dollars in fees from the program — are now releasing research reports warning that states’ financial woes may make the bonds less attractive. Some banks are even telling investors how to bet against Build America Bonds.

While most states have embraced the program, two, California and New York, account for a third of the money raised through it, said Senator Charles E. Grassley, a Republican from Iowa and a critic of Build America Bonds. “The program might be better named the Build California and New York Bonds Program,” Mr. Grassley said.

The Obama administration wants to make the program permanent, but Senate Republicans last week introduced a bill that would let it expire as scheduled at the end of this year.

It should be noted that Financial houses among others would reap massive fees from the black box deals they were orchestrating. It should also be noted the Justice Department is tackling a massive case about bid rigging in the bond market, so its not like abuse hasn't happened before. The other question is whether good deal or not, should Municipalities be taking on this much debt?