Build America Bond

Dear Mr. Berko: Please tell us who in the Obama administration came up with a federal government guaranteed Build America Bond idea issued by various states. My partner and I, if we understand the concept, think it's a wonderful idea. But could you please explain how this Build America Bond works so we can be sure we properly understand the particulars? And we have a bet on who in the Obama administration first conceived the idea. I think it's Paul Volcker, and my partner tells me that it was Nancy Pelosi or another member of Congress. We have a dinner bet on your answer. C.S. & H.R., Aurora, Ill. Dear C.S. & H.R.: The Economic Recovery Act of 2009 created a new form of municipal bond called Build America Bonds (BABs). I think BABs are a supercalifragilistic idea, and I'm as certain as morning that BABs are not the musings of any member of Congress. There's no possible way that any member of Congress could be bright enough to conceive this expealidocious idea. There are 11 members of Congress who claim this as their idea, plus ex-Vice President Al Gore. Alan "the mumbler" Greenspan has not denied this is his idea nor has Pelosi or Treasury Secretary Tim Geithner. However, if I had to ascribe authorship of the BABs concept, I would also suggest Volcker (probably the greatest Fed chairman of all time), who is one of President Obama's economic advisers. In fact, several members of Congress with whom I occasionally visit also believe that Volcker is the brains behind BAB, but Volcker denies authorship. I can't give you the answer you want, but I can tell you with absolute certainty that it was not Pelosi. She is a nice lady, but if her brains were taxed, she'd get a refund. So call your bet a draw, but I think your partner should pay for the drinks. Build America Bonds, the new wrinkle in government bonds, are issued by state, county or city governments to help finance essential projects at low borrowing costs. The attraction is a federal government subsidy: (1) The BAB buyer gets a federal tax credit of 35 percent of the interest income for each year of the BABs life or (2) the Department of Treasury directly pays the issuing municipality 35 percent of the interest cost. And because the interest is taxable, BABs are issued with coupons that are higher than comparable municipal bonds with identical maturities and credit ratings. However, contrary to what you have been told, neither the principal nor the interest is guaranteed by the Fed. BABs have been a big hit with investors. Last year, California issued a multibillion-dollar BAB with an interest rate of 7.4 percent. And because the Fed picked up 35 percent of the 7.4 percent coupon, California's out of pocket interest cost was 4.81 percent. So this BAB "may be" a good investment opportunity for IRAs and other entities that do not pay taxes. I say "may be" because California does not have the political discipline to heal its festering financial crisis. BABs have become a very popular investment since their creation by the Economic Recovery Act in 2009. And in the last dozen months, it's estimated that nearly $31 billion in BABs have been issued. During the first issue month, California sold $5.3 billion; the New Jersey Turnpike Authority issued $1.5 billion, and both issues were immediately over-subscribed. There is a secondary market for BABs, and it's beginning to compete with traditional tax-free debt, reducing the supply of old-fashioned municipal bonds. Most brokers can easily provide quotes on BABs with varying maturities and can buy them for your accounts. However, the market is very competitive, and small investors like us will compete with mutual funds, institutions and wealthy investors for supply. Unfortunately, this temporary shortage gives most brokerages an excuse to charge small investors commissions between 2 percent and 5 percent on their purchases. —————————— Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com. © 2010 Creators Syndicate Inc. Published: Wed, Mar 10, 2010

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