Build America Bonds: Good for Transportation … Good for Goldman Sachs?

The taxpayer-subsidized infrastructure financing program known as Build America Bonds (BABs), which would get a big boost in the Senate's new jobs bill, has proven helpful for local transit agencies and other transportation officials seeking a way to fund big new projects during a crushing economic recession.

24mta.span.jpgNew York's MTA sold $750 in BABs last spring. (Photo: NYT)
But Sen. Chuck Grassley (R-IA) is now investigating whether BABs are also lifting the fortunes of Goldman Sachs, the onetime government bailout recipient that continues to epitomize Wall Street excesses in the eyes of many voters.

In a letter sent yesterday to Goldman CEO Lloyd Blankfein, Grassley -- who, as the senior GOP member of the Finance Committee, has the power to make trouble for Goldman -- asked for an explanation of a Bloomberg report that cities and states are willingly paying higher commissions to big banks that underwrite their sales of BABs.

"I, too, am concerned that American taxpayers are subsidizing larger underwriting fees for Wall Street investment banks, including Goldman Sachs, as a result of the Build America Bonds program," Grassley told Blankfein, asking Goldman to reveal the total amount of fees that it anticipates getting from the stimulus law's creation of BABs.

Goldman published an ad in the print edition of Politico earlier this week hailing the Senate's move to expand BABs and labeling itself "one of the principal underwriters" for the program. BABs give state and local governments a taxpayer subsidy to help cover interest payments on infrastructure bonds, making them a more attractive financing option.

Several states used Goldman as an underwriter to sell transportation-focused BABs since last year, according to public disclosures and media reports. Among them were Maryland, Washington, and New York, where the Metropolitan Transportation Authority (MTA) paid Goldman $487,500 in advising fees last spring.

Bloomberg analyzed data last spring from the New York MTA's initial sale of BABs and found that the transit agency could have raised $9 million more to plug its budget gap by lowering the negotiated yield for its bond sale by 0.1 percent.

A Goldman Sachs spokesman responded to Grassley via Politico this morning, saying the company is "proud" of its participation in the BAB program. From that statement:

Given their taxable status, Build America Bonds open up an entirely new investor base for municipal bonds, thus helping municipalities lower their borrowing costs. Beyond this, the program has led to increased investment in vital infrastructure projects such as schools, hospitals and energy projects that create jobs in the short term. We look forward to explaining our services and the positive economic impact of Build America Bonds to Senator Grassley at his earliest convenience.
A complete copy of Grassley's letter follows after the jump.
Dear Mr. Blankfein:

I was interested to see your company’s full-page advertisement in support of Build America Bonds in yesterday’s edition of the Politico newspaper that stated that Goldman Sachs is “one of the principal underwriters…” of Build America Bonds. The “jobs bill” that passed the Senate today contained an expansion and an increase in the subsidy levels of the Build America Bonds program. This increased subsidy allows non-taxpaying entities to receive a check from the American taxpayers equal to either 65 percent or 45 percent (depending on the amount of bonds issued) of these non-taxpaying entities’ interest costs on Build America Bonds. The American Recovery and Reinvestment Act of 2009, more commonly known as the stimulus bill, allowed non-taxpaying entities to receive a check from the American taxpayers equal to 35 percent of these non-taxpaying entities’ interest costs. The President has proposed in his most recent budget for non-taxpaying entities to receive a check from the American taxpayers equal to 28 percent of these non-taxpaying entities’ interest costs.

A November 27, 2009, Bloomberg article by Jeremy R. Cooke stated that:

“States and municipalities paid an average 37 percent more to investment banks for underwriting Build America Bonds than for handling tax-exempt sales since offerings of the subsidized taxable debt began in April…. ‘The large subsidy gives them leeway to charge more because the issuer probably cares less about the underwriting fee,’” said Matt Fabian, managing director and senior analyst at Concord, Massachusetts-based independent research firm Municipal Market Advisors. ‘They shouldn’t care because federal taxpayers will cover the difference. As a federal taxpayer, I’m highly concerned.’”

I, too, am concerned that American taxpayers are subsidizing larger underwriting fees for Wall Street investment banks, including Goldman Sachs, as a result of the Build America Bonds program. I have raised concerns about the increased subsidy levels in the Build America Bonds program that passed the Senate today.

As “one of the principal underwriters” of the Build America Bonds program, please answer the following questions:

1. How much in total underwriting fees has Goldman Sachs collected to date on Build America Bonds’ issuances?

2. How has Goldman Sachs determined its underwriting fees on Build America Bonds’ issuances?

3. Are these underwriting fees larger than the underwriting fees that Goldman Sachs has charged on tax-exempt bond issuances? If so, how much larger are these underwriting fees?

4. Has Goldman Sachs received any money, in addition to the underwriting fees, in connection with the Build America Bonds program?

5. Does Goldman Sachs expect to receive additional underwriting fees if the Build American Bonds expansion and subsidy increase that passed the Senate today is enacted into law?

Thank you in advance for your prompt response to these questions.