Monday, November 29, 2010

Build America Bonds: A New Kind Of Municipal Bond To Avoid .

Build America Bonds are an emblematic part of the much maligned 2009 $787 Billion stimulus bill, and not without reason. Like most of the stimulus bill, it's a thinly disguised bailout for special interests. Build America Bonds are targeted toward bailing out irresponsible municipalities and states, allowing them to rack up $160 Billion in new debt since they were created in 2009.

Like so many things, Build America Bonds started out as a noble solution to the financial crisis, specifically the municipal bond market. In 2008, investors became wary of the swelling state and local deficits and for good reason. In 2009, 48 states had sizable deficits. In my own home state of New York, the Government has stated recently that they are facing a nearly $9 billion deficit. Unfortunately, the governor still doesn't understand the problem and continues to mis-characterize it as a revenue problem when it is clearly a spending problem, but that's beside the point. It's easy to see why investors started shunning municipal debt.

As a response, congress created Build America Bonds in which the Federal government provides 35% of the total interest paid by the bond. One has to wonder if that really means much in light of what happened to GM bond holders when the Obama administration bailed that company out. But beside that uncertainty, Build America Bonds have now created the potential for a whole new kind of debt-bomb.

Build America Bonds are slated to expire at the end of 2010, so what will happen to states who have borrowed too much already and investors want little to do with their non-Build America Bonds?

California, essentially bankrupt, has issued $21 Billion in Build America Bonds as a substitute to it's own bonds.

This Federally subsidized, cheap debt has only offered fiscally irresponsible state and local governments to continue their spending binge, and run up an even higher debt tally.

Factor in the unfunded pension liabilities most of these municipalities are carrying and you may start wondering if even the Federal government and helicopter Bernenke have the resources to cleanup the mess when these states start actually going bankrupt.



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