Deep-Six BABS Program: Political Consultant

Construction Highway
Construction Highway

The Build America Bonds (BABS) program needs to be deep-sixed, political consultant Paul Equale told CNBC Wednesday, because banks selling bonds on behalf of municipalities and states are now advising investors about how they can profit, should the governments default on their commitments.

Equale also is concerned that Wall Street firms are profiting handsomely from the sale of BABS.

Since the BABS program was introduced in April 2009 as part of the financial recovery act, banks have collected $700 million in fees from the BABS program, and the BABS account for 22 percent of the total muni issuance.

“The very same banks that are selling these bonds to municipalities are also now issuing guidance as to how investors can profit from municipalities, who are not being able to pay them back,” said Eqale of Equale and Associates.

Build America Bonds, touted as part of the solution for struggling state and local governments who need funds to pay for infrastructure—schools, roads, bridges—is now also at the center of an IRS audit looking into whether the bonds are being priced and sold properly.

However, Michael Decker, managing director of the Securities Industry and Financial Markets Association, favors the BABS program because he contends it stabilizes the market and reduces costs. He is in agreed with the Obama administration who like to see the program continue indefinitely.

“Once you offer Build America Bonds, which accrue taxable interest, you attract foreign investors, pension funds, retirement accounts—nontraditional sources of capital for the municipal market,” said Decker.

“Before there were BABs, state and local governments issued tax-exempt bonds—they still do—to finance their capital investment and that market is limited to domestic taxable investors.”

Decker said that commission fees have come down significantly.

One aspect that makes BABS attractive is that the federal government pays 35 percent of the interest costs.