Wednesday, March 10, 2010

"Build America Pays Off on Wall Street" (BAC;C; GS; JPM; MS)

From the Wall Street Journal:

Brokerage Firms Net $1 Billion-Plus for Selling the New Bonds, but Say It Can Be Hard Work
Agence France-Presse/Getty Images

BRIDGE TO RICHES: The new government bonds will help pay for a rehab of the Brooklyn Bridge. Above, during one of last month's storms.

Wall Street firms have received fees exceeding $1 billion in less than a year selling "Build America Bonds" meant to spur jobs in struggling cities, often charging municipalities higher costs than for traditional bond deals.

These new bonds were rolled out in April 2009 under President Obama's economic stimulus plan to create jobs building roads, schools and hospitals. Unlike conventional municipal debt, the new bonds are taxable and generally carry higher interest rates.

The U.S. pays 35% of the interest, so the bonds have enabled local governments to borrow during a credit crunch and save money at the same time, making the higher costs a wash for them.

The underwriting fees come as Wall Street continues to recover even as many municipalities remain in poor financial shape.

The Wall Street fees are "surprisingly high," says Edward Prescott, a Nobel-prize winning economist at the Federal Reserve Bank of Minneapolis and a professor at Arizona State University.

The banks confirm charging higher Build America fees, but say the costs are coming down as the bonds become more popular. Bank officials say the higher fees are justified because they are working harder to sell the bonds to investors who wouldn't traditionally buy municipal debt, such as pension funds, insurance companies and foreign investors.

Goldman Sachs Group Inc. is the top seller of Build America Bonds, with $9.79 billion in sales, according to research firm Thomson Reuters, followed closely by J.P. Morgan Chase & Co., Citigroup Inc., Barclays PLC, Bank of America's Bank of America Merrill Lynch and Morgan Stanley.

On average, the underwriting fees for Build America Bonds are $8.20 per $1,000, according to Thomson Reuters. By comparison, the standard fee for tax-exempt issues is $5 to $6 per $1,000, according to Wall Street banks. Thomson Reuters says 984 deals have been done since April. Underwriting fees were disclosed in just two-thirds of those, totaling nearly $1 billion. Spokesmen for all the banks declined to comment....MORE