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.

(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.