The Obama administration’s Build America Bonds (BAB) program reportedly is running into trouble, as Wall Street seeks to cash in on it.
The idea was that the federal government would cover 35 percent of interest costs that states paid for bonds issued to build schools and infrastructure.
But it hasn’t worked out so well. Big banks are charging more in commissions for selling BABs than they do for regular municipal bonds, the New York Times reports.
In addition, the banks may be pricing the bonds too cheaply, meaning that taxpayers across the country, who are footing the bill for the interest-rate subsidies, are paying more than they should.
At the same time, the pricing discrepancy has allowed speculators to make a quick profit flipping the bonds, when their price rises.
To top it off, some of the banks that have made hefty fees through the program are advising customers how to bet against the bonds, the Times reports.
However, Treasury Assistant Secretary Alan Krueger said that’s not a fair criticism, and that the Times story “paints a misleading picture,” CNBC.com reported.
“While this was true when the program first started, [Build America Bonds] underwriting fees have dropped over time and in the past few months have been in line with those for tax exempt bonds,” Krueger said in a letter to the Times, according to CNBC.
While the Obama administration seeks to make the program permanent, Republican senators have introduced a bill that would let it expire as scheduled Dec. 31.
About 1,200 BAB issues have hit the market, totaling $107 billion.
Bloomberg columnist Joe Mysak criticizes the Treasury for reducing BAB interest-rate subsidies by any amount issuers owe the government.
“This would force municipalities to come up with the cash to repay debt service at the same time they are trying to fill holes in their budgets,” he wrote.
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